Commercial Paper Rollover Under a Borrowing-Base Constraint
Northline Components has $75 million of 30-day commercial paper outstanding, supported by a $100 million 364-day revolving credit facility that expires in 45 days. The facility's borrowing base is 85% of eligible receivables ($60 million) plus 50% of inventory ($40 million), so availability is $71 million-less than CP outstanding. The company's fixed-charge coverage covenant is 2.00x; trailing twelve-month coverage is 2.05x. EBITDA is $48 million and fixed charges are $23.4 million. A rating agency has placed the A-2/P-2 rating on negative watch after a customer bankruptcy. Management expects $18 million of operating cash flow over the next 60 days and has a $10 million undrawn term loan available. The CP matures in 12 days. The treasurer must decide whether to roll the CP, draw the revolver, or repay with cash and term loan. The bank group is nervous about covenant headroom.
1. Calculate the company's available liquidity and covenant headroom, and identify the primary constraint on rolling the CP.
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Liquidity: The revolver commitment is $100 million, but the borrowing base is $71 million, so availability is the lower of the two: $71 million. CP outstanding is $75 million, leaving a $4 million shortfall if the revolver were the only repayment source. Adding expected operating cash flow of $18 million and the $10 million term loan gives $99 million of potential liquidity, but using $75 million to retire CP leaves only $24 million of net availability.
Covenant headroom: At a 2.00x fixed-charge coverage covenant, required EBITDA is 2.00 × $23.4 million = $46.8 million. Actual EBITDA is $48.0 million, so headroom is $1.2 million, or 2.5% of required EBITDA. A modest earnings decline or higher interest cost from drawing the revolver could breach the covenant.
Primary constraint: The binding constraint is the borrowing base, not the committed line size. The CP program is effectively under-supported by $4 million, and the negative watch raises rollover risk. Rolling the CP preserves liquidity but depends on market access; repaying it consumes revolver capacity and pressures covenant headroom.
2. Recommend an action plan for the next 12 days and explain the trade-offs.
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Recommend preparing to repay the maturing CP rather than relying on a rollover, because the negative watch makes renewal uncertain and the backup line is already smaller than the CP balance. The repayment plan should combine $18 million of expected operating cash flow, $10 million from the term loan, and a $47 million revolver draw. That retires the $75 million CP and leaves $24 million of revolver availability.
The trade-offs are real: drawing $47 million increases interest expense and therefore fixed charges, shrinking an already thin $1.2 million EBITDA cushion. Before drawing, the treasurer should model the pro forma coverage ratio and ask the banks for a covenant waiver or an equity cure right. The company should also negotiate a borrowing-base increase or a reduction in the CP program size to $50 million so the facility genuinely backstops the program. Rolling the CP would preserve revolver capacity but leaves the company exposed to failed rollover and possible forced asset sales. Repayment is the safer liquidity choice, provided the covenant impact is pre-cleared with the bank group.