By: Mark Gilbert, Commentary
March 6 (Bloomberg) -- ``Many small- and medium-sized businesses are not complaining about credit conditions,'' Boston Federal Reserve Bank President Eric Rosengren said in a speech last week.
Tell that to Tim Arnett in Minneapolis. About a year ago, the 53-year-old set up a company called In-Season Mechanical LLC, which installs heating and cooling systems in buildings and homes. His bank, Wells Fargo & Co., said he would need to be in business for about nine months to qualify for a loan. His revenue in the second half of last year was about $179,000.
``They're now saying we need two years of credit history before they will even consider us for a line of credit,'' says Arnett, who employs four people and estimates that revenue this year has soared to $900,000. ``Every financial institution we have talked to has used the same excuse, that banking regulators are scrutinizing loans, they're tightening up the restrictions. What they're saying is, we did some dumb things, we're not being penalized for it, but now you're going to get penalized.''
Arnett's experience underscores the difficulty facing the Federal Reserve. While it can influence the price of credit by slashing its key interest rate, the U.S. central bank can't do much to boost the availability of funds needed to keep the economy afloat.
Flexible Friends
Without a bank loan, Arnett's firm ``lives and dies by the credit card,'' he says. ``If the government is not willing to let entrepreneurship thrive, if the smaller businesses that truly have good ideas and good workforces are stymied, it's going to affect the economy nationwide, and I just don't think the government gets it.''
A study presented to a conference attended by economists and Fed officials last week suggests Arnett is in good company in worrying about the economic implications of potential borrowers going begging, even after five reductions have pushed the Fed's key rate down to 3 percent.
David Greenlaw, a Morgan Stanley economist; Jan Hatzius, Goldman Sachs Group Inc.'s chief U.S. economist; Hyun Song Shin, a Princeton University economics professor; and Anil Kashyap, an economist at the University of Chicago Graduate School of Business, estimate that U.S. mortgage losses may trigger a $900 billion contraction in lending to households and businesses.
Crimping credit, the study says, would reduce economic growth by as much as 1.5 percentage points over four quarters. ``While these estimates have many caveats, they still suggest that the feedback from the financial market turmoil to the real economy could be substantial,'' the authors wrote.
`Refunding Risk'
A study published this week by Moody's Investors Service showed 300 U.S. companies with sub-investment grade credit ratings need to refinance $13 billion of maturing credit lines and bonds this year, climbing to $28 billion next year and $45 billion in 2010. They will struggle to find new money amid rising defaults, the rating company said.
``The overall refunding risk is high for speculative-grade bonds and bank credit facilities as volatile capital market conditions outweigh slight improvements in ratings over the last year,'' wrote Kevin Cassidy, a senior credit officer at Moody's.
While the default rate for low-grade borrowers dropped to a 26-year low of 0.9 percent last year, Moody's expects the percentage failing to meet their obligations will surge to 5.3 percent by the end of the year. The combination of ``financial challenges at large banks and bond insurers, a continued housing- market slump and tighter bank-lending requirements'' will make life hard for borrowers, Moody's said.
Almost Dead
In Europe, the market for new bond sales by non-financial companies is almost dead. Just 13 billion euros ($20 billion) was borrowed in January and February, down from 21 billion euros in the first two months of last year, according to Suki Mann, a London-based credit strategist at Societe Generale SA. Moreover, he says one borrower -- General Electric Co.'s funding unit -- accounted for about 8 billion euros of this year's issuance.
Mann has cut his forecast for new bond sales this year to 110 billion euros from as high as 140 billion euros previously. That compares with more than 123 billion euros last year and 126 billion euros in 2006.
``The ongoing financial markets turmoil has resulted in a sharp increase in risk premia such that many potential issuers of debt securities no longer find the public debt capital markets an attractive place for fund raising,'' Mann says.
Cash Flow
Arnett at In-Season Mechanical is currently fitting cooling systems in a 157-room hostel that helps the destitute get back on their feet. He had to corral the charity that runs the hostel; his wholesalers; his electrical and concrete contractors; and the company supplying the air-conditioning units to ensure everyone involved got paid as fast as possible because ``cash flow is vital to any company's survival.''
With a bank loan, Arnett could expand his business even more rapidly and hire additional workers. His days of begging for credit, though, are over.
``I don't think I want to waste any more time talking to the banks,'' Arnett says. ``We're on our own. All banks look at us like lepers. By the time they're willing to offer the money, I'm not going to need it anymore.''
(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net Last Updated: March 5, 2008 19:02 EST
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