Monday, January 19, 2009

Borrowing costs are up for US businesses

From the NY Times:
[W]ith the credit markets still tight, corporations are being forced to pay much higher interest rates than they did a few years ago, putting more strain on balance sheets already hammered by falling profits and a grinding recession.

It is a lesson the discount carrier Southwest Airlines learned firsthand in December, when it went to the bond markets to raise $400 million, in part to cover its losses from betting that fuel costs would stay high.

Southwest, the only domestic airline with an investment-grade credit rating, put up 17 of its Boeing jets as collateral and agreed to pay interest of 10.5 percent, nearly double the rate it had paid in 2004 to raise $350 million. The company chafed at the costs, but it paid them because it needed cash and did not know what credit markets would look like in six months or a year.

“That’s the market now,” said Laura Wright, the airline’s chief financial officer. “There is not money available at the rates we were able to get a year ago.”

Southwest said it had seized the opportunity to raise cash at a time when other companies could not borrow at all. Companies with poor credit ratings are virtually locked out of credit markets or face the prospect of paying 20 percent interest. Many of them are slashing costs, canceling projects or putting assets up for sale to avoid defaulting on their debts.

Despite huge government rescue programs and drastic reductions in the Federal Reserve’s benchmark interest rate, borrowing costs for companies have remained stubbornly high. Investors are wary of anything riskier than ultrasafe Treasury bills, and banks, which lost billions of dollars making bad loans, have tightened their lending.
Companies in every sector are getting hit with inflated borrowing costs - the MLP industry is an excellent example of this problem. High cost of capital means that it is difficult to pay high multiples for businesses. Therefore it may be a while before the industry gets the acquisition engine going. The good news is that the cash flow that the retail side of the business is enjoying this year is very solid - so at least we have that going for us.

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