Context: Revolving credit facilities (called revolvers or RCFs) and other corporate lines of credit are cornerstones of preparing for liquidity crises requiring companies to access funding quickly—a day most hope never arrives. But as corporations learned during the pandemic, it pays to be prepared. In the spring of 2020, many companies decided to draw down funds from revolvers, add to existing lines and arrange one-year loans. This underscores the importance of credit lines—revolving or otherwise—in business continuity plans (BCPs).
Member question: “Do any companies run annual tests for their revolver drawdowns and/or credit lines? Do others run tests annually to ensure they have operational process/steps stood up for revolver draws (and/or test their credit lines) as part of their contingency funding policy or otherwise?” - The member told NeuGroup Insights they wanted “to understand how others think of contingent liquidity and operational readiness as we plan out our BCP and other tests this year.”
Peer answer 1: “We don’t run any test on the revolver.”
Peer answer 2: “I faced this question (posed by an audit committee member) at a prior company and resisted the request as the bank group did not expect [the revolver] to be drawn. At my current company, we occasionally draw on our revolver (banks expect it) and it works exactly as advertised.
- “I would suggest communicating with your banks in advance if you feel compelled to follow through. Alternatively, you could do a simple dry run with your lead bank to ensure everything is fully understood by those involved.
- “In the end, the process is very straightforward — i.e. submit a borrowing notice on time and get funded. If you’re running at the edge of your financial covenants, it might require a more involved internal process.”
Peer answer 3: “We do tests at our European Bank entity based on the regulatory requirements.”
To further explore the issue of testing revolvers, NeuGroup Insights drew down (sorry) knowledge from a NeuGroup brain trust of four former bankers: Senior Director Scott Flieger, Director Chris Hall and Senior Executive Advisors Paul Dalle Molle and Jerry Olivo. Here are some of their comments and experiences: - “A number of companies did drawdowns to make sure all systems were working, but only sporadically, not on an annual basis. Test drawdowns are small amounts, never the entire thing. A few companies would let us know it was coming, the amount and the duration, as a heads-up so the banker was not caught off guard.
- “The reason for the heads-up is so the credit department at the bank did not become alarmed by the drawdown. Unless the revolver is put in place specifically to be utilized, if an unexpected drawdown occurs, it looks like there is a problem with the company.”
- “I remember doing an annual test drawdown on a revolver once, with the rationale being the company had substantial revolver and bilateral commitments from many banks (~40-50) and they wanted to periodically test to make sure everything worked.”
- “The key is for the corporate to first have a checklist of what needs to be done to authorize internally an RCF drawdown, then a checklist of what it needs to do externally to have it become operational, including how to verify receipt of funds.
- “Then they plan a dry-run event with their lead bank, including getting the teams from the company and the bank together. Then on the appointed day they do the dry run, which can be done on the phone and via email and possibly with a non-operational SWIFT message or something similar. It is simple and quick.
- “For those rare companies that require actual drawdowns in a ‘wet dry run’ to satisfy their emergency preparedness obligations, the situation is the same. But the added complexity of explaining to the banks why you want and need an actual funding event, then receiving the money and returning it, adds to the time and complexity of the operation. And it adds a level of bank management time because this is an expense and annoyance for the banks.”
- “They could do a dry run, but without the bank participating you would not find out if your link to the bank works or if everything on their side is set up correctly such as having the correct “pay to” account. The corporate may be expecting draw proceeds in a specific account at that or another bank, but the lending bank has a different account set up on its systems.
- “In a true funding emergency you don’t want to be searching for the funds at the last minute.”
