Businesses Pinched as Loan Spigot Shuts Off

By David Cho and Thomas Heath
Washington Post Staff Writers
Monday, August 20, 2007

U.S. corporations for years operated by the maxim that you have to borrow money to make money. Now, the well of cheap loans is running dry.

The corporate bond market, the MasterCard for U.S. companies, has slowed to levels not seen since the recession of the early 1990s, as rising defaults among mortgage borrowers are causing lenders to question loans going to companies as well.

Without a healthy bond market, a swath of corporate activity is eliminated and the economy slows down. Firms stop borrowing to buy drilling equipment for coal mines, plants for manufacturing cars and land for expanding restaurant chains.

"It affects everything," Michael Tarsala, an analyst for Thomson Squawk Box, said of the bond market. "It's access to capital. It's the lifeblood of a lot of big S&P companies. . . . They've been encouraged to borrow money to make money for so long, and now the spigot's suddenly been shut off."

Shares of Hertz dropped 6 percent last week after concerns that it will struggle to get low-rate loans, the key source of financing for rental-fleet purchases.

Farm-equipment maker Deere & Co. said last week that it is "putting the brakes" on production of construction vehicles.

Mortgage giant Countrywide Financial on Thursday had to tap its entire $11.3 billion emergency funding line after it could not get short-term loans, known as "commercial paper," from the bond markets.

Home Depot is rethinking a plan to borrow money to buy back $22 billion worth of its stock. The turmoil in the debt markets might also scuttle the $10.3 billion sale of its wholesale supply business.

Six years ago, a similar scenario played out when business spending ground to a halt during a recession. Factory floors went idle. The markets dropped about 600 points in August 2001. But consumer spending stayed strong and pulled the economy through.

This time, declining home values are leaving many consumers feeling less wealthy. They might not have enough cash to make up for a loss in business spending.

"Corporate earnings and corporate balance sheets are strong; that's the good news," said John Delaney of CapitalSource, a Chevy Chase lender to medium-size businesses. "What effect the current mortgage market will have on the consumer is the open question."

The summer tends to be a slow time for bonds. But it usually is not this bad: There were fewer corporate bond deals in July than in any month since December 1990, according to Thomson Financial.

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