Last week, we were surprised to hear that a few companies quickly drew down on their revolving lines of credit. In the case of Ventas, the amount was $2.75 billion and they withdrew 2020 earnings guidance as well. For Brookdale Senior Living, they did a full drawdown of an unspecified amount, and also withdrew their 2020 earnings guidance. Omega Healthcare Investors drew down $300 million. Mostly, these were stated to be for precautionary and future liquidity reasons.
We were a little surprised that a few more companies did not withdraw 2020 guidance, but perhaps they are not at risk as much as Brookdale and Ventas with the seniors housing uncertainty and vulnerability. Capital Senior Living withdrew any guidance last year, and we will finally hear from them next Tuesday, March 31, on the “fourth” quarter results. They had better shed some light on the first quarter as well.
While all good reasons in this uncertain time, there was probably another reason for the drawdowns. Usually, in any loan like a revolving line of credit, every time that a company makes a draw under it, a senior employee, usually the CFO, Treasurer or CEO, has to certify, in writing, that there has been no “material adverse change” in their business or financial condition (the MAC clause).
As of last week, there had been no material adverse change for these companies (way too early in this crisis) so they were all good to go. By the time they “may” actually need use of the funds, things could change, and they would not be able to certify that no material adverse change has occurred.
Obviously, we do not know if this is the reason, or one of the reasons, for preemptively drawing down on the credit facilities. Cheap as they are in this low interest rate environment, it does seem odd to make these drawdowns before they are needed, other than for the reasons above. This is especially true with Ventas’s huge drawdown, unless they are really gearing up to fund a large acquisition. We can only hope. Perhaps for Justin Hutchens’ signing bonus? He can only hope.
Some of the REITs have cash on hand to cover any problems in the next three to six months, if that is how long this crisis stays with us. They are taking the risk that they will not be subject to the MAC clause at that time. But at least they are not paying interest on debt they do not need today.