1. Why would a company potentially seek funding by way of its revolving credit facilities as...

1. Why would a company potentially seek funding by way of its revolving credit facilities as opposed to the bond market?

2. Why did recently many companies issue bonds to pay down their revolving credit facilities despite the fact that the rates on bonds are significantly higher than the rates on revolving credit facilities?

Expert Solution

1]

A revolving credit facility is a form of lending arrangement where the lenders approves the maximum permissible borrowing limit, and the borrower can borrow any amount upto the approved limit at any time required.

A revolving credit facility may be preferred by a company over the bond market because :

In a revolving credit facility, interest is charged only on the amount actually borrowed. If nothing is borrowed, no interest is charged. Hence, this is much more flexible than borrowing in the bond market, where interest has to be paid on the borrowed funds, even if the borrowed funds are not used.
The company may require some short-term borrowing, but is unsure of the timing and amount. A revolving credit facility gives the company the flexibility to borrow only the amount needed, and at any time. However, issuing bonds is a lengthy process, and is unsuitable for short-term borrowing.

jeff jeffy answered 1 year ago

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