Times are tough, but bank credit still flowing - Business First of Louisville:

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Global capital markets have come closwto meltdown, with Wall Street firms in The Federal Reserve is focused on getting bank to lend to each but banks are afraid they'll get suckedx into other banks' subprimd mortgage-backed bonds. The commercial mortgage-backed security markett is tanking along with the residentialmortgage That's on the macro level. On the real-world level, tertiary markets such as Louisvillew appear tobe insulated. The question is, will the mone y be there to keep local businesses even inhard times? So far, the answer is yes -- strong companies with impeccable credity histories can borrow, an immutabl e fact of bank lending.
For everyone well, there's private equity, investors "and rich uncles," as Phillipl Poindexter, senior executive vice president and director of commercialp lendingat , said. For the conventional businesx owner looking fora loan, 2008 isn't profoundly differen t from the boom years in the said Poindexter and other bankers. The cost of money for banks has rarelybeen lower. The discount rate -- the rate the Federakl Reserve Bank charges banks to borrowmoneyg -- was 3.25 percent on Tuesday.
The dichotomy of this particular crisis is that even though capital is gettinvg cheaper as the Fedcuts rates, globa capital problems have increased commercial bankers' historifc adversity to risk at a time when federaol officials are trying to spur economic "It's a very unsettled time," said Jim senior vice president at Louisville-based Banks are increasinhg scrutiny of borrowers, their creditworthiness and their proposecd deals, and lenders are increasingly cautiousx about anything speculative. "And the key word here is " including deals collateralized by real Wheatley said. But, he added, "the fundamentals never change.
" If companiexs have cash reserves, cash flow, good performance and debt repayment there is plenty ofmoney available. For those "every bank wants your business," Wheatlehy said. "It's a buyer's market. There are too many dogs and notenough rabbits." Fundamentalse might never change, but terms do. Bank underwriting standards requiree certain amounts of cash in certaih typesof transactions. Banks in general aren't makingv exceptions to those requirements, said Wheatlet and Poindexter. "In the old days, banks might have done dealz with a little lesscash (put in by borrowers), wher now they're sticking to the rule book," Wheatley said.
There are 40 or 50 banks in Louisviller in the commercial andindustriap loan, or C&I, Poindexter said. Local banks such as Stoc k Yards arefairly predictable, good times or bad, he said. "We've always been a consistently restrainedlender ... even when everyone else was go-go-go," Poindextedr said. If there's a difference now, it's that Stockk Yards is hewing even more closel to prudentlending guidelines. For the but potentially lucrative, deals -- for for large speculative mergers and acquisitions and real estate and retailldevelopment -- cash is harder to come by.
An estimated $100 billiom in capital worldwide has disappeared during nearly eighft months of financial calamity related to the subprimewmortgage crisis. Beginning with the collaps of two hedge fundslast June, Bear Stearns and othe r investment banks and consumer such as , have racked up huge lossesd in sub-prime mortgage-backed securities related to risinbg defaults. On March 6, Thelma Ferguson, Kentucky market president forNew York-based , told Rotary Club of Louisville Inc. members that problems relater to subprimemortgages "won't go away anytime Nationwide, she said, a totall of about $3 billion in subprims mortgages had gone bad, with another $2.
6 billion in adjustable- rate mortgages set to go to higherf interest rates this year. Ferguson predicted that stronfg banks, such as Chase, will have recorc growth this year, even after limited chargeoffs, becausew of the diversity of their business and what shetermsa "fortress balance sheets" -- tight financial controls, largd loan-loss reserves and prudent lendint that avoided, for the most part, the subprime Last October, J.P. Morga n Chase's reported record third-quarter income of $3.378 billion at the same time competitorss Citigroup and UBS were receiving cash infusionwafter multibillion-dollar write-downs.
But, Ferguson told Rotary credit standards forconsumer lending, especiallyh for mortgages, will tighten. In previous capital crises, regional banke would "cut off the valve," said Larryu Myers, president and CEO of Firstt SavingsBank FSB, based in That is, big banks wouled issue a new lendin g policy ruling out certainj types of loans, or loans to particulatr industry sectors, said Myers, who formerly worked for Nationa l City. "They'd throw out the good with the Small communitybanks can'tg do that, Myers said. They have to assesd deals based on whether borrowers are reasonablewcredit risks, with good work ethicv and productive companies.
"I think (local banks) could be the knight in shining armor inall this," he No capital, no growth There are severe probleme in capital markets where largd national and international banks do business, said Donalcd J. Mullineux, professor of banking and finance at the Universityhof Kentucky's Gatton College of Business and Economics. The effect of the globalo capital crunch on community banks with lessthan $1 billion in assetas is far harder to gauge, said Small banks mainly raise capital through deposits, "sio they're just not present in thoss (global capital) markets.
" "I wouldn't say (community banks) are not affected at all, but rather they're affected through macro economicc channels," he said. The United States most likely is in Mullineux said. In times of and with bank examinera increasingly lookingover bankers' shoulders because of questionablse lending practices at some banks, most banks lend less At the same time, business slows, and corporations tend to ask for less so demand for capital drops, he said. Some alreadgy see hints of a slowdown. Most banke are seeing increases inloan delinquencies, Wheatley said. A nationap survey last month of U.S.
Small Business Administrationb lenders reported that SBA lenders have tightened standards on loans and that loan volumed is down by 15 percentg from the first quarterof 2007. LLC in Shepherdsvillee has had no trouble borrowingy fromits bank, Pittsburgh-based PNC Bank NA, said Nicholas X. "Nick" Simon, Publishers His 142-year-old business is the area's largest privatelt owned employer, ranked No. 14 on Busineses First's list of major with about 1,700 employees. It has a strong net-worth-to-debt healthy cash flow and a soundxbalance sheet, Simon said.
Publishers has a line of credit tied to theprimed rate, the rates at which big bank s lend to their best But Simon does see some weaknes among his customers, such as an increasing number of slow payers. "A couple of businesses -- customerxs I've had for years -- have bounced checksd that have never bouncedchecksd before," he said. The question ultimately is: What happens to economix growth ina worst-case scenario?
Most likely, the deeperd the recession, the longer the return to "What you see (during economic crises) is that on bank balancde sheets, banks want to carry fewer loans, preferring to hold securities," Mullineux "As the economy gets back on its feet, the banke will sell those securities and use that cash to starf lending again." The current capital crisis started with bankws and mortgage brokers making mortgage loans to including real estate speculators, with poor credigt ratings, questionable income and no money down.
Many of thosre mortgages included adjustable interesr rates that reset to doublre or triple theintroductory rates, with penalties if borrowersw refinanced. If that weren't bad enough, those subprim e loans, through the magic of securitization, got turnee into highly rated collateral for bond issues and other debt instruments such as collateralizeddebt So, when those dicey mortgages startedd going bad, and borrowers startefd defaulting, the banks and mortgage lenders started losintg their principal. But the pain didn't stop there. Those defaulte set in motion falling dominos as the housing bubblee created by the artificially inflatedc mortgage demandquickly burst.
The mortgag defaults also meant that some investors stopped getting returnas from thosesubprime mortgage-backed bonds as the underlying collateral went bad. Thos investors included some of the biggest namesd onWall Street, including Merrill Lynch and the now infamous Bear Stearnsa Co. hedge funds. Moreover, problems with residentiapl mortgage-backed securities have cut confidence incommercial mortgage-backed securities and in the increasinglyh interconnected world capital market matrix as a New companies, job creation may suffer as capital grows tighteer Although established businesses so far seem unaffectedx by the ongoing capital growth companies that create new jobs might be hardest hit.
Sincw March 2007, Randall Waldman has buil t , based in Shepherdsville, from an idea into a thrivingt operation with a totalof 240,000 squar e feet in manufacturing capacith in three locations. With collateralized contractsa fromand , Waldmaj projects that Integrity will have between $30 millioh and $50 million in revenur for 2008. Integrity started a year ago with sevemn employees and now has morethan 200. Waldman has investesd $4 million of his own moneyt into Integrity. Yet last December, as Waldman received the emerginf company of the year award inBusinesse First's Business of the Year he asked the crowd of 800 why no banks would lend Integrityh money.
Waldman said banks have turned down his requests for credir because hiscompany doesn'g have three years of financial He said he has difficulty getting capita l at reasonable rates for expansion, with Integrity borrowingy at 7 percent or 8 percent on amortized term debt -- two or more pointes above the current prime rate of 5.5 Waldman believes part of the problem is that the global capitalk crunch is making local lenders gun-shy. But he said the main reasonb Integrity has problems getting bankrates -- far cheape r than private-equity funding -- is becaus the company doesn't have an established credit And that makes it difficult for banks to asses the risk.
Banks have to consider the cost of fundds versus therisk they're taking, said Jim Wheatley, senior vice president at 1st Independence Financial Groupp Inc. and a commercial lender for more than 20 Banks typically borrow directly fromthe Fed, or from othee banks, for five years at very favorable interestt rates, and they make a profit by lending that money at a higher rate. Business customers can go onto the Federal DeposigInsurance Corp. Web site and see what banks are payingbfor money, Wheatley said. During the past week, the Fed lowerede two key rates.
Both the discount rate, the rate the Fed chargez banks to borrowmoney directly, and the Federal Fundsd rate, the rate banksa charge each other, dropped. The federal funds rate droppexdto 2.25 percent from 3 and the discount rate droppeed to 3.25 percent from 3.5. But bankes have to figure in their cost just like any otherbusineses -- the cost of buildings, employees and utilities. and shareholder profits," Wheatley said. Typically, banks take a less than 10 percent returnon investment, which turns to an even smallefr amount after expenses and dividends to stockholders, he said.
Though the bank'z return is predictably modest, the entrepreneurs mighg make a million dollarxoff loans. "Their potential return is almosty infinite." But the bank is going to make itsmarginap return, Wheatley said. "Mty question is: Where in the world is that entrepreneurr who's willing to take as much risk as the bankfor (a few percent) They may become a but the bank still gets prime." But if fast-growinv companies have trouble getting access to the local economy withers, Waldmanb said. Integrity is in the running for several huge contracts, including one worthy as much as $350 million over five yeare from a government entity Waldmann declined to identify.
With large Louisville employers such as Waldman said, he believes emergingt mid-sized manufacturing operations such as Integritt "have the potential to be the next big We create real jobs, paying real money, that stimulated the real economy," Waldman said. "Th e economy will thrive or die baserd on the ability of these businessesx to get capital to createnew jobs."