External Financing of Last Resort? Bank Lines of Credit as a Source of Long-Term Finance
80 Pages Posted: 4 Oct 2015 Last revised: 3 Aug 2019
Date Written: June 25, 2019
We find credit line drawdowns are an important source of long-term finance for capital expenditures and acquisitions for all but the highest rated firms. Unrated and to a lesser extent intermediate-rated firms draw down credit lines most frequently when capital market conditions are unfavorable. Firms repay long-term credit line drawdowns relatively quickly, with 2/3rd of drawdowns being repaid within 2 years, while other sources of long-term debt financing are substituted. Tighter covenants in credit line are one major reason firms repay credit lines as market conditions improve. In this way, long term credit lines act like a bridge financing mechanism.
Keywords: Lines of Credit, Financing of Last Resort, Liquidity Buffer, Long term financing
JEL Classification: G21, G31, G32
Suggested Citation: Suggested Citation