Companies beef up contingency plans ahead of US debt-ceiling deadline

© Reuters. FILE PHOTO: A nearly deserted Church Street in the financial district in lower Manhattan is seen during the outbreak of the coronavirus disease (COVID-19) in New York City, New York, U.S., April 3, 2020. REUTERS/Mike Segar

By Laura Matthews

NEW YORK (Reuters) -Some corporate treasurers are stepping up their contingency plans to address any upcoming funding and liquidity needs to get ahead of the risk of debt default as talks in Washington drag on, finance executives and advisors said.

With the U.S. Treasury Department warning that the federal government could run out of money to pay all its bills as soon as June 1, some companies are now timing their bond issuance and are moving to secure enough liquidity in advance in the event a default occurs and seizes up the market.

"It's better to avoid hitting the debt capital markets around the debt ceiling, given the uncertainty" said Alvaro Ortega, vice president of finance at Avangrid (NYSE:AGR), a sustainable energy company based in Orange, Connecticut.

Ortega said Avangrid has about 13-months of liquidity at hand to conduct its business, and that communication with the company's banks is ongoing. Ortega did not name the banks his company deals with.

Avangrid has a committed revolving credit facility, which allows committed access to liquidity at any moment. It uses this type of credit to support its commercial paper, an unsecured promissory note that pays a fixed interest rate, that can be used to finance short-term liabilities such as capex, operating expenses and payroll.

With little time to spare to head off the risk of default, President Joe Biden and top congressional Republican Kevin McCarthy on Thursday appeared to be nearing a deal to cut spending and raise the debt ceiling.

Amol Dhargalkar, global head of corporates at Chatham Financial, also said he is seeing contingency planning across the board with the firm's clients.

Companies are "fine to still do issuances this week", but are avoiding an issuance the first week of June.

"Companies don't want to do it (and) banks don't want to be underwriting deals either, because investors may not end up funding those deals," said Dhargalkar.

Avangrid's Ortega said his banks have been sending out a calendar showing when to avoid debt issuances.

"We know those specific dates around the debt ceiling situation there will be uncertainties. So, they recommend, for instance, not to hit the market on those dates with bonds," Ortega said.

Chris King, co-founder at Dukes & King, a corporate finance and risk management firm, said at least one of his corporate clients has begun some refinancing work as "a general de risking."

King added that with the heightened economic risk, proactively assessing overall exposures and risks "ensures you can be well positioned ahead of any forthcoming downturn."

Chatham's Dhargalkar said even a minor inconvenience around the debt ceiling can be significant to companies, leading to dramatic changes in their funding plan and costly delays.

HOLD OFF ISSUANCE

Many companies who have held off on issuing bonds so far this year have decided to issue in May for fear of heightened pricing volatility from June through September, should the debt ceiling standoff continue, according to market participants.

Yuri Seliger, head of credit strategy at BofA said he expects $140 billion in issuance volume in May, a significant spike so far this year and almost double the $85 billion issued last May.

According to a banker who works on debt syndications, their team is avoiding syndicating deals next week on expected market volatility, as well as due to holiday vacations during the Memorial Day week. The bank and borrowers plan to re-examine the market the following week of June 5, the banker said.

"If this continues to go on, there could be quite a little bit more volatility," said Natalie Trevithick, head of investment grade credit strategy at asset manager Payden & Rygdel.

"There's so much uncertainty from the beginning of June to September, so it seems to make sense for the issuer to get rid of that uncertainty by issuing now," she said.