Wall Street Journal - 09/15/98
By MICHAEL SELZ
Hawker Pacific Aerospace Inc.'s aircraft-maintenance business may be soaring, but the small concern's financing strategy suddenly has stalled.
Steep drops in stock prices grounded the company's plan to issue $50 million of convertible securities to pay off debt and fuel further growth. To keep its funding effort flying, Hawker considered selling high-yield bonds instead and slashing the amount it raised to $20 million. But demand for junk bonds has plunged, too.
"Everything's on standby at the moment," says Brian Aune, chief financial officer of the Sun Valley, Calif., firm.
Hawker is among many growing, small companies whose financing efforts are in a tailspin. Heightened economic uncertainty has devastated public markets for their securities. Of 29 initial stock offerings
postponed since Aug. 1, two-thirds were small issues of $50 million or less, according to Securities Data Co., Newark, N.J. So far in the third quarter, the value of new, high-yield bond issues of $50 million or less has fallen 17.5% from a year earlier, Securities Data reports.
Clipped 'Angel' Wings
While turmoil in the public markets has upset the fund-raising plans of companies of all sizes, it is proving especially troublesome for smaller firms with fewer resources and financing alternatives.
Start0ups seeking seed money may be suffering most of all as the stock market's decline erases some of the wealth of the people who supply such funding.
With the investment portfolios of people who back start-ups plummeting in value, these so-called angels "don't feel as angelic," says William Dunkelberg, chief economist for the National Federation of Independent Business and an angel himself.
Earlier this year, Mr. Dunkelberg wagered $100,000 on a fledgling information-technology concern -- a bet he says he would now be afraid to make. That company is trying to raise another $100,000, but this
time it is seeking $25,000 from four angels rather than the whole amount from one, Mr. Dunkelberg says. "Angels' wings have been clipped," he declares.
Brandon Jones is finding that out the hard way. Beacon Systems Inc., his two-year-old computer-software company in Bryan, Texas, is trying to raise $400,000 from angels, Mr. Jones says. The 30-day effort so far has been unsuccessful. The potential investors Mr. Jones has approached "already are feeling skeptical about the stock market," he says. "The last thing they want to do is put money into a start-up."
Mr. Jones says he may be forced to return to some of the 16 investors -- most of them family and friends -- from whom Beacon Systems already has obtained $100,000. "That's about all I can do at this point,"
he says.
Corporations Offer Less
Moreover, publicly traded corporations, which have been huge sources of funding for small concerns, are starting to divert cash to buy back their own shares, says Andrew Duncan, president of EC Co., a Palo
Alto, Calif., provider of software to conduct electronic commerce.
Since its founding in 1996, EC has raised $16 million from Intel Corp. and other big companies, Mr. Duncan says. But the company's attempt to collect as much as another $10 million in corporate
investment is taking longer than expected. Distracted by the falling value of their own shares, public corporations seem "less inclined to make investments in small companies that further their strategic
mission," says Mr. Duncan, who had hoped to close his latest round of financing last month.
EC may seek additional funding from venture capitalists, whose partnerships with pension funds and other institutions are still overflowing with record sums raised in recent years. But Mr. Duncan says he will have to reduce the price of his company's shares to woo them.
With declining demand among public and corporate buyers driving down the value of venture firms' existing investments, venture capitalists now are offering less for new stakes in companies. "Their job is
to increase returns to their investors, and one way to do that is to pay less," says Allan Will, an entrepreneur turned venture capitalist and chairman of the Foundry, a business incubator for medical-devices firms in Redwood City, Calif.
Banks: Willing Lenders
The frustration in finding financing is prompting some firms to turn back to banks for needed funding. Telscape International Inc. is considering increasing its bank borrowing, says its president, Scott Crist. The small Houston telecommunications concern had planned to sell nearly four million shares of stock and $125 million of high-yield bonds to upgrade its communications network in the U.S. and extend it into Mexico, Mr. Crist says. But the public market for the securities the company hoped to offer "is nonexistent right now," he says.
Most banks are still eager to lend to even the smallest business borrowers, especially those seeking refuge from the public markets to which lenders for years have been losing commercial customers.
Nationally, the value of small-business loans rose 9% last year, while lending in some big markets grew far faster, according to an analysis by PCi Services Inc., a Boston supplier of software that helps banks comply with federal lending regulations. In Los Angeles, it jumped 27% in 1997, PCi says.
Making loans to small concerns "has never been more competitive," says Michael James, an executive vice president at Wells Fargo & Co. in San Francisco. Wells, for instance, has stepped up marketing to
small-business borrowers through direct-mail offers that provide loans of as much as $50,000.
But banks' aggressiveness, which already has raised concern among regulators, may foreshadow a sharp rise in loan losses and an ensuing credit crunch at a time when many small firms are viewing such
lenders as one of their last financing alternatives.
"I continue to see banks make credit decisions that got them into trouble not long ago," says Penn Ritter, a principal at Business Lenders Inc., a commercial-finance company in Hartford, Conn. "Their
appetite to make loans is so voracious I think they're also eating the collateral." |
