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Nervous banks cut off some borrowers, tighten reins on others

October 6, 2008

Local companies that rely on credit have seen their borrowing power shrink and in some cases disappear as a deep freeze in the nation's credit markets drives fears of a broad economic slowdown.

A handful of businesses, including a Greenwood security firm and an Indianapolis contractor, already have shut down after credit dried up, and others are on the ropes as troubled banks seek to limit their loan exposure.

"We're talking to borrowers every day whose lines are being reduced or loans are being called even if they don't have a payment default," said Jean Wojtowicz, president of locally based Cambridge Capital Management Corp., which operates several alternative-financing funds.

One local construction company with some financing through Cambridge is facing foreclosure even though it hasn't missed a payment since 2004, Wojtowicz said. The company, which she declined to identify, has seen its revenue fall but remains profitable.

Banks are digging into the fine print of loan contracts--citing financial performance or collateral levels--to pull loans now seen as too risky, she said. Every bank is doing it to some extent.

"From our standpoint, when banks pull back and get more conservative, we obviously see opportunities for alternative sources of capital," Wojtowicz said. "Hopefully, when the dust settles soon, people like us will get busy while banks remain conservative."

Banks still are lending, but with a more wary eye at credit-worthiness. They're most carefully dissecting the potential risk of businesses such as franchise restaurant operators, builders, building-supply firms and automotive-parts suppliers, said Mike Alley, president of locally based Patriot Investments and a former local president of Fifth Third Bank who still serves on its Indiana advisory board.

In one national example, a Bank of America loan program for McDonald's franchisees has reached its funding limits, Advertising Age has reported.

"I think lenders are taking a hard look at areas where they have more risk exposure than they want or they're comfortable with," Alley said. "It's impacting the accessibility of credit to large businesses, small businesses and consumers across the board."

Rescue hopes

Most local companies so far have felt only peripheral effects from the credit crisis, but even the unscathed are keeping a watchful eye. They're hoping a Wall Street rescue package helps calm credit markets.

Meanwhile, companies are taking a page out of the bank playbook: developing a strategy for survival.

"There's a much higher degree of caution," said Roland Dorson, president of the Greater Indianapolis Chamber of Commerce. "I have heard about capital purchases being delayed, hiring decisions being pushed out. It's not like credit has completely shriveled up, but it is forcing people to look very closely at their business operations."

The problem is not yet widespread, but it could get worse, Alley fears. He expects consumers will see some of their own credit, including credit-card lines and home-equity loans, begin to evaporate.

The problem now is liquidity, but the long-term cause is overconsumption and a lack of adequate regulation, he said.

"Banks have a limited supply of capital, and as they've suffered losses and hits to their loan-loss reserves, that impairs capital even further," he said. "Basically, that capital level will determine what kind of loan volume they can enjoy. If capital volume goes down, they have to reduce loan exposures."

Casualties of the credit crisis include surveillance and security firm American Sentry Guard, which had to fold in August after a couple of customers went bankrupt and New York-based JP Morgan Chase & Co. pulled the plug on a line of credit.

The Greenwood-based company had 43 employees with annual revenue of $8 million and in 2006 landed on Inc. magazine's ranking of the 500 fastest-growing U.S. private companies.

Mechanical-contracting firm Frank E. Irish Co., which helped build Lucas Oil Stadium, closed in May after National City Corp. yanked a loan.

Company President John T. Irish said he had been trying to find alternative financing when the bank pulled the plug, a move he told IBJ at the time had little connection to the company's financial condition.

"We've never had a loss year in our 92 years," he said.

Loans not impossible

Developer Beilouny Luxury Properties is facing the prospect of bankruptcy as its new condo building, the $20 million 707 East North, sits unfinished downtown. Company President Ed Beilouny said Fifth Third cut off the project's funding before the interior was complete.

"As far as the credit markets go, I don't know what to tell you," Beilouny said. "In December, we had Fifth Third throwing money at us. They promised to give us money to finish the project, but we haven't heard from them."

Representatives of Chase, National City and Fifth Third declined to discuss specific situations but said they are still lending to credit-worthy customers.

"Is credit a little tougher to get today than it was a year ago? Yes," said Chase spokeswoman Nancy Norris. "But we are still lending. Each situation is different. What we want to do is work with our clients. This is why the relationship is so important."

Credit hasn't dried up completely for established names in real estate even as ventures seen as more risky are having trouble, said Jim Thomas, a partner at local developer Hearthview Residential.

Thomas and his partners, who in total have built $1.6 billion in projects nationwide, closed on a $40 million loan last month to build an apartment complex called Prairie Lakes in Noblesville.

"We did an Indiana Jones and slid under the magic rock just as it was closing," Thomas said.

He doubts the same deal would be available today.

Small businesses stung

Small businesses are more at risk than their large counterparts since they rely mostly on banks for financing.

About 57 percent of economic development professionals nationwide reported insufficient credit for businesses and reduced business spending in a September survey by the International Economic Development Council, while 71 percent have seen halted or delayed real estate developments.

Particularly at risk are businesses that use bank lines of credit to carry inventories and receivables.

Five weeks ago, Celadon Group CEO Stephen Russell got a call from Charlie Johnson, the owner of a Louisville trucking firm stung by high fuel prices and the sagging economy. Banks no longer wanted to lend him money to keep his 90 trucks on the road.

"He said, 'Can you buy some of my trucks or trailers?'" Russell said. "I told him we weren't in need of equipment at the moment."

Then, early one recent morning, Johnson called back, "almost a quiver in his voice," Russell recalled.

The bank had frozen his accounts, including gas cards for truckers.

"He couldn't write a $5 check," Russell said. "We ended up taking the routes and he shut down his company."

In past economic crises, banks simply would demand more collateral to make loans. "Now banks aren't doing things because they're worried about their own liquidity," Russell said. "I've seen eight freight recessions in 35 years. But I've never seen a freight recession like this one because in this one the banks are in bad shape, as well."

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