While economists and pundits debate whether the economy is truly coming out of recession, one thing is certain: You’d be hard pressed to find a better time for investing in new capital projects. Inventories are finally down to where demand is starting to outstrip supply. Interest rates are lower than they’ve been for three decades. And on Saturday, President Bush signed a bill that will allow companies to write off a greater chunk of their investments in new plants and equipment.
In fact, in CFO’s most recent global confidence survey, 41 percent of the respondents said they plan on increasing capital spending in the next quarter. But finance chiefs looking to fund real estate acquisitions or finance the construction of new facilites may be in for a rude awakening. The awful truth is, many CFOs will find it difficult to line up adequate financing for sizable capital projects.
Indeed, in the sixth months after 9/11, lenders have started to insist that collateral of borrowers be fully covered for the risks of terrorism. “Today we will not consider any loans in excess of $50 million without full terrorism insurance coverage,” says Kieran Quinn, CEO of Column Financial, a Credit Suisse First Boston subsidiary. “And we are scrutinizing all loans in excess of $20 million if they have any terrorism exclusions.”
Quinn’s not exaggerating. In testimony before the House Financial Services subcommittee last month, the CSFB banker told lawmakers that he recently turned down six loans valued at about $300 million — and said he had discouraged many more.
Without coverage, banks are backing off. The problem is, many big corporations are finding it nearly impossible to procure “full” terrorism coverage at a sane price. In a recent report, Richard Hillman, financial markets and community investment director of the U.S. General Accounting Office, noted that one U.S company couldn’t get a mortgage on an office building that “had a guaranteed multimillion-dollar cash flow for the next 20 years.”
The reason? The company couldn’t buy enough terrorism insurance to cover the building’s replacement value, Hilliman said. Before the attacks, the company’s management paid $60,000 for $80 million of insurance, including terrorism coverage. After 9/11, only one carrier made an offer — and the price was $800,000 for far less coverage. “Without this loan and others like it,” Hillman asserts, “the firm’s future growth potential is severely limited.”
Better in the Luge
Granted, companies can buy freestanding terrorism policies with coverage limits of $25 million or $50 million. Lloyd’s of London and AIG, among others, offer such policies. But $25 million may not be a whole hell of lot coverage for a borrower with a fair number of billion-dollar properties.
As treasurers and risk managers are discovering, stand-alone terror coverage now costs as much as all other forms of property insurance combined. Until recently, a $100 million property policy (including terrorism coverage) might cost as little as $200,000, says Bob Smith, Northeast regional executive officer for insurance broker Willis. Today, the same policy costs anywhere from $400,000 to $600,000 — and excludes terrorism risks. To get an added $25 million of terrorism coverage, Smith says, a buyer might have to pony up an additional $500,000.