To Lend and Lend Not

Corporate borrowers are finding that an investment-grade credit rating makes a big difference.

The economic fallout of September 11 is finally beginning to be reflected in production and employment figures. But for Matt Hart, CFO of Hilton Hotels Corp., the impact was immediate. “We knew right away that the attacks would hurt our business,” says Hart. He also knew his bankers would be sweating bullets. With airplanes grounded for days, and the American public afraid to fly in them once they resumed service, Hart knew his hotels would lose business. He didn’t expect long-term damage, but the flood of cancellations that followed the attacks would hurt cash flow for several quarters and put Hilton in danger of breaching covenants on its loans and revolving credit facilities. “The issue was, do I go to my bankers now for amendments and wiggle room, or do I wait until I’m out of compliance?” says Hart.

He took the former approach, meeting with lead banker Bank of America a week after the attacks to discuss an adjustment to the loan covenant. For a “modest” amendment fee, he got his adjustment, ensuring that Hilton wouldn’t be out of compliance on its loan agreements for the next 18 months. “The banks have been supportive,” says Hart. “I think they have a different attitude now about requests for relief.”

Of course, it helps if you’re an investment-grade credit. Many companies adversely affected by the terrorist attacks haven’t had as understanding an audience with their bankers. Wyndham International, a hotel and resort chain with no rating by Moody’s Investors Service or Standard & Poor’s Corp., got a waiver from lead banker J.P. Morgan Chase, but it reportedly also had to suspend dividend payments on its preferred stock, limit capital spending, and use all proceeds from asset sales to repay loans.

While bankers have been relatively accommodating to borrowers hurt by the attacks, they are not ignoring trends in corporate credit quality, which have been deteriorating since last year. “There’s been a pretty dramatic tightening [in the bank market] since September 11, but the trend goes back more than a year,” says Daniel Gates, head of syndicated loan rating at Moody’s. And it extends far beyond such travel-related sectors as hotels and airlines, which were most directly affected. Dozens of sectors of the economy, including technology, telecommunications, manufacturing, and retail, have been experiencing slower growth for more than a year. And that weakness is showing up in the asset quality of bank loan portfolios. The aggregate provision for credit losses for the top 20 U.S. banks rose to $6.8 billion in the third quarter, more than twice the figure for the same period last year, according to Moody’s. Actual loan charge-offs also doubled, to $4.8 billion. With corporate credit downgrades still outpacing upgrades by a margin of 2.9 to 1 in the third quarter, and loan defaults not expected to peak until the middle of next year, bankers will be monitoring their existing portfolios all the more carefully–extraordinary circumstances or not. And as for extending new credit, CFOs can expect the recent tougher lending standards to continue.

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