Why would a publicly listed corporation establish a line of credit that is to be fully collateralized in cash? Here is the relevant language from the 8-K:
" Collateral Account : As collateral for all Obligations, the Borrower shall deposit with Lender funds in an amount not less than the Loans (the “Collateral Account Requirement”), which account shall be account number XXXXXXXXXXXXXX (the “Collateral Account”), and which Collateral Account shall not be otherwise encumbered except as permitted by this Agreement (the “Collateral”). Any amount in the Collateral Account in excess of the Collateral Account Requirement shall be available for withdrawal from the Collateral Account by Borrower at Borrower’s request. "
In other words, “you can borrow money as long as you keep the same amount of money on deposit with us in a non-interest bearing account.” (The “non-interest bearing” bit is set forth elswhere, not in the above text.)
The company in question has around $50 million invested in short-term Treasuries, which currently pay jackshit for interest… The credit line is for a smaller amount, less than $15 million.
So, without the credit line, if that company wants to use some of its funds, let’s say $5 million, it still has $45 million of unencumbered capital, and has no indebtedness so it owes no interest.
With the credit line, the company pays 0.15% on any unused amounts of the credit line, and then when it goes to draw down $5 million on the credit line it has to move $5 million to the collateral account and it now gets the privilege of paying interest on the $5 million it borrowed, while still only having $45 million of unencumbered capital available to it. So you have higher costs than you do without the credit line.
I am sure there is a reason for establishing this credit line, but I am wondering what it is?