The Standoff Continues

As banks and companies hoard their cash, credit remains extremely tight. That's forcing CFOs to explore new (and old) options.

In the global pursuit of credit, few CFOs are as fortunate as Holly Koeppel. The finance chief of American Electric Power, one of the nation’s largest generators of electricity (and consumers of credit), Koeppel has access to several lines of credit totaling $4 billion, provided by a consortium of 28 domestic and international banks. When the commercial-paper market dried up last fall, hampering AEP’s ability to raise near-term cash, Koeppel drew $2 billion from the facility, banked the cash, and gradually retired the commercial paper. “That was our bridge to get us through the end of the year so we could stay out of the long-term credit market when it was roiling,” she says. When the seas calmed temporarily in January, the utility waded back into the credit markets with a successful bond offering at 7 percent, a remarkably reasonable rate.

Koeppel concedes a degree of luck in her credit arrangements. A company far more emblematic of the times is FlexSol Packaging, a privately held $250 million maker of packaging and films for food and beverage companies. FlexSol used to enjoy unfettered entrée to traditional working-capital lenders that were only too happy to finance its equipment needs. “I’d access capital through leasing groups like General Electric or Merrill Lynch, which had a big leasing arm,” says CFO David Schaefer. Lenders were so eager, in fact, that Schaefer often got 15 solicitations a week. These days, not so much. “I get no calls now from cash-flow lenders,” he says. “It has affected our ability to undertake acquisitions or do much in the way of capital expenditures.”

Most U.S. companies, especially non-investment-grade firms, are similarly constrained as they search for ways to obtain credit and refinance or extend debt facilities. CFOs with bank and capital-market debt maturing over the next two years — more than $700 billion in loans come due in 2009 alone, says Standard & Poor’s — in particular are trying to buy time. Even those with credit agreements extending beyond 2010 face possible reductions in the amounts they can borrow. In February, the Federal Reserve reported that many banks had reduced the dollar limit on existing lines of credit — 50 percent did so on credit lines extended to financial institutions, 30 percent on business credit-card accounts, and 25 percent on commercial and industrial credits. Heaping insult upon misery, some banks are selectively dropping out of lending syndicates.

“We’re working with a lot of banks that have exited facilities because either they no longer find them profitable at improved pricing or they have liquidity or capital constraints and have to prioritize who they want as a customer,” says John Walenta, director of the corporate and institutional banking practice at Oliver Wyman. Walenta cites European banks as taking “an especially harder look” (see “A World of Trouble“).

There are no magic answers to the continuing problem of how to finance projects, acquisitions, and equipment under current conditions. Well, maybe one: some companies have opted out of the hunt altogether. Having cut plant, equipment, and inventories, their capital needs have shrunk dramatically. Indeed, 60 percent of domestic and foreign banks reported a reduction in demand for commercial and industrial loans during the fourth quarter, according to the Federal Reserve.


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