Banks becoming choosier about business lending

Some are insisting that companies conduct other business with them

`Prepared to part company'

May 05, 2002|By BLOOMBERG NEWS

NEW YORK - U.S. banks have been hitting the brakes harder on loans to companies than at any time in at least three decades, tightening standards and refusing to finance businesses that don't retain them for other services.

Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp. and others lent companies $1.02 trillion during the first quarter, down 7.4 percent from the first three months of last year, according to U.S. Federal Reserve figures. The decrease followed a 6 percent year-over-year drop in loans to U.S. companies in last year's fourth quarter.

Dynegy Inc., a Houston-based energy trader, recently was forced to pay more to obtain a $900 million credit line to replace an expiring $1.2 billion agreement. Other companies, including Bemis Corp., the biggest U.S. maker of plastic wrap, and Lee Enterprises Inc., a Davenport, Iowa-based newspaper chain, found it more difficult to borrow in the first quarter, a trend analysts said might limit an economic recovery.

"Certain loans that would have gotten done before won't get done now," said Charles Shufeldt, executive vice president at SunTrust Banks Inc. The 10th-largest U.S. bank, which hasn't broken out figures on corporate lending in the first quarter, reduced overall loans about 3 percent in the period. The Atlanta-based bank's loans to companies fell 6 percent to $28.9 billion last year.

`Increased caution'

Even banks that have avoided lending to Enron Corp., Kmart Corp. and other companies that went bankrupt in the past six months have scaled back lending.

"There's increased caution, without a doubt," said Kevin Sullivan, global head of loans for Frankfurt-based Deutsche Bank AG. Europe's biggest bank participated in more than $9.4 billion of loans in the United States in the first quarter, less than its $11.5 billion quarterly average last year.

At the same time, many companies have needed less financing in the past year as they cleared out inventory. Some borrowers have taken advantage of the lowest interest rates in 40 years to sell corporate bonds. U.S. companies increased sales of investment grade bonds 6.8 percent to $855.9 billion in the 12-month period ending March 31, according to Bloomberg data.

Bank lending typically lags behind the performance of the economy. The Fed's detailed data on commercial bank lending, which it started publishing in 1972, show the steepest previous year-over-year drops in quarterly bank lending to companies were 4.3 percent in 1992 and 4.5 percent in 1975, when the United States was pulling out of recession.

Signs of life

Some bankers think corporate loan demand might be stirring.

"For the first time since the fall of 2000, the feedback from corporate CEOs is what I'd call cautiously optimistic," said Carlos Evans, head of middle-market lending at Wachovia Corp. in Charlotte, N.C. The fourth-largest U.S. bank is betting on a rise in demand from companies with annual sales of $10 million to $250 million.

Others have doubts. "I'm not sure loan demand has bottomed yet," said SunTrust's Shufeldt.

Companies seeking loans are facing higher hurdles.

Lee Enterprises, which borrowed $350 million from a Bank of America-led group in March, found bankers more reluctant to lend to companies that didn't want to hire them for more-profitable investment-banking services, said Chief Financial Officer Carl Schmidt.

Peter Hong, treasurer of Ingersoll-Rand Co., said banks "are more disciplined about making sure they get profitable business." The maker of Bobcat loaders and Schlage locks is negotiating renewal of a $1.25 billion credit line from J.P. Morgan that expires in July.

Typically, fees for issuing investment-grade bonds run about 0.5 percent, five times what banks earn for arranging a loan.

Bank of America and Bank One Corp. have said they would prune client lists to focus on customers prepared to hire them to sell bonds or shares. J.P. Morgan is scaling back credit lines that support companies' short-term debt, encouraging borrowers instead to sell longer-term bonds.

"If we can't find a fit with our client in terms of the exposure we're willing to take and the amount of return we need, then we are prepared to part company with those clients," Bank One Executive Vice President Jack Neal said in a February interview at the Chicago bank's headquarters.

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