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Risk of credit crunch materializes
By JEFF HARRINGTON © St. Petersburg Times, published December 13, 2000 Executives at Beall's Department Stores have been hearing an ominous rumble lately behind the tune of ringing cash registers. "We just came off our best year ever. We blew away our profit plans by terrific margins and yet the drums are beating," said Steve Knopik, president of the Bradenton department store chain. The drummers are his bankers. They've told Knopik to be prepared for rate increases when Beall's renews both its seasonal and long-term borrowing. Oh, and the spreads probably will be less favorable. Perhaps loan terms will be shortened as well. The country is not in a full-blown credit crunch -- yet. But clearly money isn't flowing as freely to business anymore. For several years, easy access to credit has spurred the nation's economic growth and vice versa. Now, venture capital firms are getting pickier about which start-ups to grace with dollars. Profitable companies that happen to be in industries out of favor on Wall Street -- such as health care, retail and telecommunications -- are receiving the same chilling message as Beall's. And bankers squeezed by higher interest rates and more problem loans aren't inclined to be as generous with commercial loans. "Bankers sitting out there looking at the economy see just what you and I see, and I'd like to think they are rational enough to react to that," said Alex Hager, director of the division of banking in the Florida comptroller's office. "We're seeing a little more of the tightening of the belt." In the Federal Reserve's latest "beige book" survey, lenders indicated they have tightened credit between August and November in much of the country and plan to tighten more before the end of 2001. The meltdown of a host of dot-coms has strengthened lenders' resolve to be more conservative. So has a growing roster of problem loans reported by institutions from megabanks such as Bank of America down to the community bank level. Among the victims are companies that have relied on syndicated loans provided by a group of banks. The problem is tied into the merger spree of the last decade. For instance, say Bank A and Bank B each provided $100-million in financing to the same customer. After the two banks merge, they might decide not to shoulder a combined $200-million in financing for the single customer. Still, many regulators and companies think it's premature to speculate about whether the country is facing a credit crunch. There's no sign of rampant overbuilding in commercial real estate. No surge in unemployment. Nothing like the savings and loan crisis of the late 1970s. And there is plenty of capital out there looking for the right home. "It's not like the '60s and '70s where we had a much more regulated environment and the Feds were pushing up interest rates making capital unavailable," said Jack Phelps, the Atlanta-based regional manager of the Federal Deposit Insurance Corp. "With deregulation," Phelps said, "we now have a lot more credit providers out there. It's not just the banking system." Even within the banking system, there is fierce competition for the customer dollar, especially in deposit-rich enclaves such as Florida. According to the Federal Reserve, most of the country showed increasing evidence of a slowdown. But the Atlanta region, which includes Florida, was one of four districts boasting "moderate, steady growth." Paul Mellini, the area president for First Union Corp., said he hasn't become less aggressive on lending. And First Union has no shortage of competitors offering credit between new community banks eager to grow their deposits and large out-of-state banks such as Wachovia trying to build a Florida base. As a result, some area companies are inclined to scoff at talk of a credit crunch. "We've had absolutely no indication of any changes, tightening or anything like that," said Mike Hagan, chief financial officer of Tampa pantsmaker Tropical Sportswear. Terms of his company's $110-million revolving line of credit haven't changed since June 1998. Still, the axiom about credit is the same in business as it is in personal finance: There's always plenty of credit available to those that don't need it. A textbook case is OpenNetwork Technologies of Clearwater, which makes a popular software that allows companies to select which of their employees or vendors can see certain information. The company grew by 1,913 percent over the past five years, making it the fifth fastest-growing company in the region. Chief financial officer Mike Landis projects OpenNetwork will continue growing at a 160 percent clip for the next several years. And he isn't worried about finding money to fuel the expansion. "We've got some very deep-pocketed investors right now," Landis said, "and we're starting to receive interest from institutions beyond our current institution." The software company is considering going public within two years but there is no financial pressure to do so. In October, it closed on $13-million in outside funding from a private group that includes Chase Capital and GE Capital. Digital Lightwave, a once-struggling company boasting a dramatic turnaround, tells a similar tale. "As we've moved forward and been successful, we've not found any shortage of credit or financing available to us," said Steven Grant, executive vice president and chief financial officer of the Clearwater company. His primary lender is First Union and its affiliates. Grant said he hears of other companies that have experienced tightened credit, particularly those planning an initial public offering to raise money. "Fortunately, we don't have to participate (in the equity market) at this point," he said. Hardest hit by the dry-up in the IPO market have been tech companies, specifically dot-coms that not long ago were going public with a flourish. Now, many are struggling to find private or public financing or are picking up the pieces from a public offering gone sour. Martin Donsky, who tracks venture capital financing in Florida for PricewaterhouseCoopers, said South Florida has been the part of the state most affected by the dot-com fallout. "The dot-com exuberance was pretty strong in Boca Raton and Fort Lauderdale," he said. "There is blood. There will be more blood." Unable to go public on their own, more entrepreneurs have attempted reverse mergers with a "shell company" in order to go public. But that route comes with risks. Some shells are ticking time bombs or criminal fronts. "You could be inheriting a nightmare that it takes two years to get out of," Donsky said. Going forward, the biggest question is how tightly the banks will pull in the reins. If they tighten loan terms a little bit, lenders are only heeding the advice of regulators. But last week, for the first time, Fed chairman Alan Greenspan hinted there is a danger if the banks go too far. In the past several years, access to credit has fueled strong investment by businesses which, in turn, has maintained the surge in productivity. "If you choke off the air supply for these companies, you could end up with a much bigger downturn," said Scott Brown, senior economist for Raymond James Financial. "That's the real fear and, I think, the message that Greenspan was trying to get across."
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From the Times Business report
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