Protecting Lines of Credit (LOC) and Arbitrage to Offset Interest

[Kim Hopkins]

Hello Friends!

One of our goals right now is to increase our liquidity so that we can take advantage of any opportunities that arise in this changing market, especially in the case that traditional financing becomes unavailable or the terms become (more) unattractive.

One of these methods is to get lines of credit, which we're doing through HELOCs as well as an unsecured business line of credit. 

We don't need the funds yet since we haven't found any opportunities (which could be a whole different post). However, we've heard that lines of credit were closed without warning by lenders in 2008 if they weren't already drawn out.

One strategy we've heard from people is to draw on the lines of credit now, even though the funds are not needed. However, we obviously don't want to pay a ~6% interest rate on money we're not using.

Some people have said there are ways to arbitrage this debt with short term methods that will either yield a small profit, or simply break even. An example might include hard money lending.

However, it's a bit of a Catch 22. Because it's an uncertain market right now, with an even more uncertain future, we don't want to make any risky investments or do hard money lending, since it's exactly the failure of these types of projects that will potentially create buying opportunities for us in the future. (In other words, if we're betting that these projects might fail, we certainly don't want to invest in them now!)

Two resulting questions:

1. Do you think there is a likely probability that the lines of credit will be closed by the banks if they are not drawn out? (And why?)

2. Can you think of any low risk arbitrage ideas to break even on the interest expense if we were to draw on the lines of credit now, prior to having a buying opportunity in place?

Thank you!

Kim