You Can Run But You Can’t Hide

Finance chiefs around the world agree that credit is hard to come by and there is little relief in sight.

Koeppel concedes there was a degree of luck in her credit arrangements. A US company far more emblematic of the times is FlexSol Packaging, a privately held, $250m maker of packaging and films for food and drink companies. FlexSol used to enjoy unfettered access to traditional working-capital lenders only too happy to finance its equipment needs. “I’d access capital through leasing groups like General Electric or Merrill Lynch,” says CFO David Schaefer. Lenders were so eager, in fact, that Schaefer often got 15 solicitations a week. But times have changed. “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 US companies, especially non-investment-grade firms, are similarly constrained as they search for ways to obtain credit, and refinance or extend debt facilities. In particular, 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-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% did so on credit lines extended to financial institutions, 30% on business credit-card accounts, and 25% on commercial and industrial credits. Heaping insult upon injury, some banks are even dropping out of lending syndicates.

There are no magic solutions as to how to finance projects, acquisitions and equipment in such conditions. But there is a practical step: to opt out of the search. Having cut plant, equipment and inventories, some companies’ capital needs have shrunk dramatically. Indeed, 60% of banks worldwide reported a reduction in demand for commercial and industrial loans during the fourth quarter of 2008, according to the Federal Reserve.

But if they don’t want to sit out the downturn, CFOs in the US trying to corral capital can turn to European or Asian banks or smaller, regional banks that have sturdy balance sheets. Adding more banks to a revolver, for example, can reduce a company’s exposure to, and reliance on, any one bank. “CFOs called on in the past by second-tier European and Asian banks interested in joining their lending facilities might want to call them back,” says Walenta. As a group, he notes, Japanese bankers are looking to increase their presence in the US, as are banks from Singapore and South Korea. “These are potential pools of liquidity that US multi­nationals [in particular] can tap into,” says Walenta.

Paul Reilly, CFO of Arrow Electronics, a BBB-rated global distributor of electronic components, has been approached by several non-US banks that want to join the company’s revolving-credit facility. “It’s a great comfort factor for us in that they understand that our business model is to generate more cash in a downturn, and they are willing to work with us,” he says. For the time being, though, Arrow is sticking with its current banks.


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