Fed Walks Inflation/Recession Tightrope in Effort to Cool Economy

Market/Industry Anomalies Delay Bulge Facility Pay-Downs, Keep Grain Prices High

In our last issue, we highlighted the increasing demand for working capital loans, or bulge facilities, driven by the recent spike in commodities prices. In normal years, bulge facilities are paid down during springtime, which makes way for a new crop to be delivered to the co-op. 

In the last few weeks, some co-ops have paid down their lines of credit due mainly to shipping/sale to end-users. However, so far in 2022, grain shipping tie-ups and the continued run-up in commodity prices are causing bulge facilities to remain outstanding through June or longer. Some margin money has recently come back to the co-ops on market down days, but that could be short lived given market volatility, e.g., India’s decision to restrict exports. 

The global grain supply is short due to the significant lack of exports from Ukraine and Russia. The supply of fertilizer has also been affected negatively by the war, leading to doubling or tripling of prices. 

Additionally, plantings have been behind in several states because of excess moisture in the north and east, and lack of moisture in the south. Transportation logistics have slowed the shipment of grain the past six months, encompassing trains, trucks and barges. Cost for transportation has been increasing due to labor and fuel costs.

Market Volatility Prompts Capital Strategy Rethink

Despite increased market volatility across debt and equity, communication companies have maintained good access to capital markets because their services have become a fundamental part of modern life and business.

However, the market volatility and rising rate expectations have required finance and treasury teams to take a renewed look at their capital strategy:

• With rising rates, fixed/floating balance has become a higher priority, especially if capital expenditure plans are being financed with floating-rate-delayed draw facilities, which could skew the ratio more toward floating over time as funds are expended.
• Over the last few years, higher enterprise valuations have supported higher leverage levels. That—coupled with cheap debt—pushed many companies to consider higher leverage options from institutional lenders. With institutional debt having become more expensive lately, finance teams face tougher decisions when reaching for higher leverage versus staying at lower leverage where commercial/Farm Credit debt pricing has remained stable or tightened on a margin basis.

Beware of Inexperienced Commercial Banks Entering the Project Finance Space

Members of CoBank’s Capital Markets team recently participated in several power and energy industry conferences with a focus on project finance, including Infocast’s Projects & Money Conference, the S&P Global Platts Global Power Markets™ Conference and Infocast’s Solar + Wind Finance & Investment Summit.

A notable takeaway was the presence of many new commercial bank lenders that have appeared at the fringes of the project finance market promoting their active support of renewable (clean) energy. Many sponsors have voiced their concern that in the recent past, some less experienced project finance entrants have been prone to providing incomplete or inconsistent commitments to the industry and sponsors of new projects. Unaccustomed to the structural nuances inherent to project finance, new entrants may unwittingly agree to provide only partial solutions with looser structures or lower pricing than established market participants. Notably, they tend to only commit small amounts to transactions, leaving a financing gap that requires other lenders to fill.

CoBank, a decades-long supporter of renewable and thermal project finance, has a deeply experienced team of professionals in capital markets, coverage, credit, legal and operations. The team is fully fluent in the nuanced aspects of the market and has committed $750 million or more to provide complete solutions with properly priced and structured transactions for sponsor relationships, a task that newcomers cannot fulfill.