Texaco May Pay Added $32 Million : $1.6-Billion Credit Line to Help Head Off Liquidity Crisis

Texaco’s new short-term credit line of $1.6 billion could cost it $32 million more in interest and fees over the next two years than the company would have paid under its normal credit arrangements, based upon figures released Tuesday by the company.

That amount is the difference between the going rate for commercial paper--unsecured debt that is customarily used by top corporate borrowers to finance immediate cash needs--and the higher rate demanded by the syndicate of 25 commercial banks that agreed to provide the credit.

Texaco late Monday announced the two-year agreement by which it will turn over to the banks up to $1.6 billion in receivables, mostly payments due from customers, in return for the credit line. The pact all but eliminated the prospect that the White Plains, N.Y.-based oil company would face a liquidity crisis stemming from its inability to borrow money in the public credit markets.

In releasing the terms of the new arrangement Tuesday, however, Texaco also said that it was “no longer maintaining” $4 billion in other, standby bank credit lines.

The bank syndicate is headed by Manufacturers Hanover Bank (Delaware). California banks in the lending syndicate are Bank of America, Security Pacific and First Interstate.

Texaco’s overall problems are the result of last month’s $10.53-billion damage judgment issued against it by a Houston trial jury on a claim by Pennzoil that Texaco had illegally interfered with Pennzoil’s plan to buy 42% of Getty Oil Co. Texaco outbid Pennzoil for all of Getty.

Because Texas law would require Texaco to post a bond of at least $12 billion before appealing the judgment, the company had said it might be forced into seeking protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

After Texaco obtained a temporary restraining order in federal court here last week barring Pennzoil from enforcing the court judgment, the two companies announced that they are negotiating an out-of-court settlement of the dispute. Those talks are continuing.

Texaco’s new line of credit will carry an interest rate set at 0.75 percentage points over the London Interbank Offered Rate, or LIBOR, a banking industry benchmark akin to the U.S. prime rate. LIBOR is currently quoted at an annual rate of 8.0625%, making Texaco’s nominal interest 8.8125%. Texaco also agreed to pay the banks an up-front fee, considered unusual in such short-term transactions, of 0.125%, or as much as $2 million.

Commercial paper currently sells in a range of 7.75% to 7.85% for maturities of from 30 to 90 days.