This article from Bloomberg reports that banks are tying corporate loan rates to credit-default swaps.

(emphasis mine)

Citigroup, Credit Suisse Link Loans to Swaps in Shift
By Pierre Paulden and Caroline Hyde


Oct. 29 (Bloomberg) -- Citigroup Inc. and Credit Suisse Group AG are among banks tying corporate loan rates to credit-default swaps, raising borrowing costs and exposing companies to derivatives accused of crippling the financial system.

[…]

Companies such as FirstEnergy may have little choice but to accept the new terms. Banks arranged $603 billion of loans in the U.S. this year through yesterday, down from $1.73 trillion in 2007, according to data compiled by Bloomberg. Even a plan by U.S. Treasury Secretary Henry Paulson to buy $250 billion of shares in financial companies as part of a global injection of $3 trillion into capital markets may not be enough to stem the lending decline.

`That's Crazy'

The inclusion of the swaps shows that banks are shifting away from setting loan pricing by relying on debt ratings and Libor, a benchmark rate that is set each day in London by tallying the cost of 16 banks to borrow from each other. Three-month Libor, the typical benchmark for loans, rose to 4.82 percent on Oct. 10, the highest this year, as markets froze. The rate was set at 3.42 percent today.

The move to swap-based pricing may leave companies exposed to fluctuations in instruments that aren't listed on government-regulated exchanges.

``That's crazy,'' said Lynn Tilton, chief executive officer of $6 billion private-equity firm Patriarch Partners in New York, which loans or lends money to more than 70 companies. ``This will accelerate the downward spiral of market prices and raise borrowing costs to unsustainable levels.''

[…]

``We're going through a transformation right now with regard to pricing of credit,'' FirstEnergy's Scilla said. ``It wasn't long ago that banks were basically giving away credit. That could be part of the reason we're in the problem we're in today. And those days are gone.''

My reaction: The tying corporate loan rates to credit-default swaps is a very negative development for the world economy. Significant leverage was used to build up the CDS market to $60 trillion, and that leverage has only begun to unwind. In order to close out their positions, leveraged CDS issuers will be forced to buy back the huge quantity of insurance they issued, driving up the cost of insuring corporate debt. Corporations which take out loans tied to their CDS are going to be crippled by rising interest costs.

For more about CDS, read The pain from the unwinding CDS (credit default swaps) market is just beginning