With the credit crunch in full swing, companies big and small are having to scramble to find financing. The usual venues for loans have dried up. Total U.S. syndicated corporate loan issuance—loans banks made with the intent to sell them off to investors—fell by more than 60% year-over-year during the second quarter of 2008, from $581.8 billion to $229.6 billion, according to Reuters (TRI). Major players, including Merrill Lynch (MER) and Deutsche Bank (DB), have all but exited the U.S. syndicated loan market, with their issuance dropping from nearly $30 billion and $50 billion, respectively, to a combined $5.5 billion during the same period.
Banks haven't ceased lending altogether, of course. But they've tightened their standards enough that companies, once flush with opportunities, have fewer options to meet their borrowing needs. The latest Federal Reserve Loan Officer Survey found that more than 80% of domestic banks had increased the spread over their cost, effectively raising rates, and 8 out of 10 said they had tightened lending standards. "Ten banks used to bid [to finance] our projects," says Mark Laport, president and chief executive of hotel developer Concord Hospitality. "Now we grovel and beg."
But all the imploring in the world won't necessarily result in a loan, as AIG (AIG) discovered. Despite the best efforts of Goldman Sachs (GS) and JPMorgan Chase (JPM) to arrange a $70 billion short-term loan for AIG, other financial institutions balked. The U.S. Treasury was then forced to step up as lender of last resort, supplying an $85 billion lifeline. But the loan didn't come cheap: AIG will pay 8.5 percentage points over the London Interbank Offer Rate, which computes to roughly 11%. The insurance behemoth will also give the U.S. government a nearly 80% equity stake in the company. "It's a very risky move, and the terms of the loan reflect that risk," says Stephen J. Czech of SJC Capital Partners.
New Players on the Scene
Most companies, of course, cannot rely on the U.S. government as a backstop. (Just ask Lehman Brothers.) But even as companies find traditional credit sources drying up, new ones are emerging. GE Capital (GE) and BNP Paribas (BNPP.PA), once barely in the top 25 among syndicated lenders, have jumped into the top 10. Meanwhile, the financing arms of companies such as IBM (IBM) and Caterpillar (CAT) have continued to expand. Private equity firms and hedge funds, too, are getting into the game. When HedgeFund.net launched its asset-backed lending index, which tracks hedge funds that use investor capital to make loans, in May 2007, it had just 30 funds; now there are more than 90.
Nonetheless, even the strongest companies are finding that they have to jump through hoops to secure financing. Allegheny Energy (AYE), a Pennsylvania utility, needed $550 million to begin work on an electrical grid project that would help reduce the stress on the Appalachian infrastructure. Working with its regular lender, Citigroup (C), and BNP Paribas, a French bank that specializes in long-term infrastructure projects, Allegheny, structured the loan in a way that appealed to both types of banks—the financial-services behemoth and the project lender. Still, while negotiating a loan normally takes two to three months, the company said, it took twice as long to cobble together a financing deal in this environment. And while the 5% rate on the loan is higher than it would have been before the start of the credit crunch, Allegheny Chief Financial Officer Philip Goulding feels the company "achieved a fair and reasonable rate."