More Firms Turn to Loans as Stock Slump Dries Up Capital
RELATED SYMBOLS: (NT)
Jun 25, 2001 (The Dallas Morning News - Knight Ridder/Tribune Business News via
COMTEX) -- Before the crash of the tech economy, Nortel Networks Corp. could
rely on an ever-ascending stock price to generate capital for its needs.
Now, as the company restructures after posting an astounding $19.2 billion
quarterly loss, only cash will do. So Nortel has turned to billion-dollar lines
of credit to help make ends meet.
The line at the loan window is growing, too. A recent Federal Reserve report
found that for the first time in this slowdown, some companies are borrowing to
pay bills, not just to finance growth.
"Telecommunications is a classic case in point," said Lynn Reaser, chief
economist at Banc of America Capital Management in St. Louis. "They have more of
a reliance on short-term funding because of pressures on profit margins and cash
flows. They're having to use more bank funding for that purpose."
Their options are few, especially since the capital markets are essentially
closed to them. Nortel, the Ontario-based telecom giant with U.S. headquarters
in Richardson, has seen its stock slide from a 52-week high of $87 to $8.75 on
Friday.
"Their financial flexibility has been severely diminished in this environment,"
said Jay Ritter, a telecommunications analyst at Morningstar.com.
That shift first appeared in the Dallas area around December and January. The
stock market seemed stuck in reverse, and the Fed had only begun its streak of
five-going-on-six cuts in the federal funds rate, said Gary Pitcock, senior vice
president of business banking managers at Wells Fargo Bank.
From his office in Richardson's Telecom Corridor, Richard Ramey sees the effects
of the economic slowdown all around him.
"Working capital lines are being used a little bit more," said Mr. Ramey,
executive vice president of the business banking group for the Bank of Texas.
And companies are holding their cash a bit longer, too. "[We] see an overall,
across-the-board, increase in account receivables that are aging," Mr. Ramey
said. "Accounts that took 30 days to pay now take 40 days."
Business has slowed, but by no means is it in decline, he added.
Economists say the lending shift is a natural consequence of deteriorating
economic conditions.
"Companies are not as likely to be investing in plants and equipment. They're
looking at covering operating expenses," said Keith Leggett, a senior economist
with the American Bankers Association in Washington. "It partly reflects the
fact that as the economy has slowed, it has had some negative impacts on
corporate profitability. They need, literally, more cash."
By itself, using a credit line for working capital isn't necessarily a sign of
distress.
"Most companies have working capital lines of credit as well as term financing,"
noted Norm Bagwell, president of Bank One Dallas. "As people spend less on
expanding their business, there's not as much term financing being done. They're
using working capital in the shorter term."
On the other hand, other analysts say the Fed hasn't found this type of activity
since the last recession ended in the early 1990s.
Lenders, noting a deterioration in credit quality in the last year, have
responded by tightening credit standards. Fed chairman Alan Greenspan last week
cautioned bankers against overreacting and cutting off financing for companies
that remain healthy.
"Sometimes a credit crunch can exacerbate a downturn, but we don't appear to be
in that state of affairs currently," said Banc of America's Ms. Reaser.
In the meantime, local bankers say, the slowdown has presented them with other
opportunities. Bank of America has seen more asset lending -- whereby borrowers
pledge assets as security on loans, according to Jamie Harden, a senior vice
president in commercial banking.
"As cash flow is drying up a bit, they are looking to finance their assets
more," he said. "We've been as busy [now] as we've been in the last six months.
The fundamentally strong companies are still looking to grow."
Wells Fargo's Mr. Pitcock remains optimistic.
"This is what happens when the economy slows down," he said. "I think we're
maybe getting somewhere toward the end of this."
By Angela Shah
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(c) 2001, The Dallas Morning News. Distributed by Knight Ridder/Tribune Business News.
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