US banks have been hitting the brakes on loans to companies harder than at any time in at least three decades, tightening standards and refusing to finance businesses that don't retain them for other services.
Citigroup Inc, J.P. Morgan Chase & Co, Bank of America Corp and others loaned companies US$1.02 trillion during the first quarter, down 7.4 percent from the first three months of 2001, according to US Federal Reserve figures. The decrease followed a 6 percent year-over-year drop in loans to US companies in last year's fourth quarter.
Dynegy Inc, a Houston-based energy trader, yesterday was forced to pay more to obtain a US$900 million credit line to replace an expiring US$1.2 billion agreement. Other companies, including Bemis Corp, the biggest US maker of plastic wrap, and Lee Enterprises Inc, a Davenport, Iowa-based newspaper chain, found it more difficult to borrow in the first quarter, a trend analysts said may limit an economic recovery.
"Certain loans that would have gotten done before won't get done now," said Charles Shufeldt, executive vice president at SunTrust Banks Inc. The 10th-largest US bank, which hasn't broken out figures on corporate lending in the first quarter, reduced overall loans about 3 percent in the period. The Atlanta-based bank's loans to companies fell 6 percent to US$28.9 billion in 2001.
Even banks that have avoided lending to Enron Corp, K-Mart Corp and other companies that went bankrupt in the past six months have scaled back lending.
"There's increased caution, without a doubt," said Kevin Sullivan, global head of loans for Frankfurt-based Deutsche Bank AG. Europe's biggest bank participated in more than US$9.4 billion of loans in the US in the first quarter, less than its US$11.5 billion quarterly average last year.
At the same time, many companies have needed less financing in the past year as they cleared out inventory. Some borrowers have taken advantage of the lowest interest rates in 40 years to sell corporate bonds. US companies increased sales of investment grade bonds 6.8 percent to US$855.9 billion in the 12-month period ending March 31, according to Bloomberg data.
Bank lending typically lags the performance of the economy.
The Fed's detailed data on commercial bank lending, which it started publishing in 1972, show the steepest previous year-over-year drops in quarterly bank lending to companies were 4.3 percent in 1992 and 4.5 percent in 1975, when the US was pulling out of recession.
Some bankers think corporate loan demand may be stirring.
"For the first time since the fall of 2000, the feedback from corporate CEOs is what I'd call cautiously optimistic," said Carlos Evans, head of middle-market lending at Wachovia Corp in Charlotte. The fourth-largest US bank is betting on a rise in demand from companies with annual sales of US$10 million to US$250 million.
Others have doubts. "I'm not sure loan demand has bottomed yet," said SunTrust's Shufeldt.
Companies seeking loans are facing higher hurdles. Lee Enterprises, which borrowed US$350 million from a Bank of America-led group in March, found bankers more reluctant to lend to companies that didn't want to hire them for more-profitable investment-banking services, said Chief Financial Officer Carl Schmidt.
Said Peter Hong, treasurer of Ingersoll-Rand Co: Banks "are more disciplined about making sure they get profitable business." The maker of Bobcat loaders and Schlage locks is negotiating renewal of a US$1.25 billion credit line from J.P. Morgan that expires in July.