Some of the largest and strongest US companies are reporting difficulty accessing essential credit, according to research from Greenwich Associates.
A survey of US companies reveals that companies of all sizes and credit ratings are seeing access to short and long-term financing sharply diminished. In past market downturns, US banks have drastically pulled back on their credit commitments to the least qualified borrowers but continued to extend loans to companies with solid, investment-grade ratings.
However, banks are not lending. “This is different and deeper than perhaps anyone imagined,” said Greenwich Associates consultant Steven Busby. “This is a true crisis of liquidity — even the strongest companies are struggling to get short-term financing. It may not be long before companies are forced to curtail operations due to lack of funding and the full consequences of this crisis become evident in the broad economy.”
US companies expect a deep and long economic downturn. The flow of credit to US companies of all sizes and credit strength has dwindled and companies able to secure credit are paying a steep price.
According to the survey 45% of large US companies access to commercial paper markets has decreased as a result of the current market turmoil. Over 70% of companies say pricing on commercial paper programs has increased, including 22% that report their pricing has increased “significantly.”
Dislocations in the commercial paper market are affecting companies of all sizes with 43% with over $5 billion in annual sales saying their access to commercial paper has been reduced. Among companies with annual sales of $500-$999 million the share jumps to approximately two thirds.
Almost a quarter of US companies say these historic shifts in credit conditions have increased their needs for credit to fund ongoing operations. Smaller companies are feeling the pinch the most. One third of companies with annual sales of $500-$999 million say market turbulence has increased their need for operational funding.
Among the industries with the highest proportion of companies saying they have experienced an increased need for operational funding are consumer goods (36%), industrial/transportation (28%) and financial institutions (26%).
The report says 42% of large US companies have seen their ability to secure revolving credit facilities has decreased or significantly decreased. Over two thirds say pricing on these facilities has increased.
Hardest hit have been companies with credit ratings of BB or below, more than half of which say their access to revolving credit facilities has been reduced.
A further 52% of companies overall say their access has been reduced and almost three quarters say their pricing has increased or increased significantly. Among the smallest companies in the survey, three quarters say it has become more difficult to secure term loans, as it has for 60% of companies with below-investment-grade credit ratings.
The report reveals 62% companies say their ability to issue long-term bonds has been curtailed, including 64% of companies with more than $5 billion in annual sales. Seventy-seven per cent of companies say pricing on long-term bond issues has increased, including 30% saying their costs of funding have increased “significantly.”
Companies with investment-grade ratings are more likely than their lower rated counterparts to say they have experienced an increase in pricing on their long-term bonds, at 83% to 66%.
Almost every company surveyed expects the current US economic downturn to last for at least the next year. Nearly a third expects the slowdown to last 18 months or more.
Only 4% of companies think the economy will turn positive in the next six months; 47% expect the slowdown to last for 18 months or longer.
Greenwich Associates surveyed 291 companies about how the current market turmoil is affecting their ability to secure credit. Interviews were conducted via the internet from September 16-24.
Source : hedgefundsreview.com
