Businesses Pinched as Loan Spigot Shuts Off

The seizure of the corporate bond market might be temporary and is not necessarily a sign of recession. On Friday, the market enjoyed some relief. Several big firms, including Johnson & Johnson and Wal-Mart, announced multibillion-dollar bond deals, jumping on market optimism from the Federal Reserve's surprise decision to cut its lending rate for banks.

Yet some economists worry that a prolonged slowdown in the bond markets would damage company earnings, which have been the lone bright spot in the worsening credit crunch.

"Main Street needs Wall Street. Main Street produces the real stuff in the economy, but ultimately that's financed through Wall Street," said David Rosenberg, Merrill Lynch's chief economist for North America. "The question remains: Who will provide credit to the economy?"

A prolonged credit crunch could also spoil some bond deals in the works. According to Dealogic, a research firm, corporations have withdrawn at least $60 billion worth of bond offerings since late June because no one would fund them at low rates. That figure probably represents just a fraction of the loans pulled off the bond markets but never officially announced, an analyst from the firm said.

Quebecor Media, the Canadian media giant that owns the Toronto Sun and a television station in Montreal, canceled a $750 million debt offering last month after the bond markets started going haywire.

"We were going to the markets. . . . We would get capital at a very, very low cost," said Luc Lavoie, executive vice president at Quebecor Inc., the holding company for Quebecor Media. "We were more in the process of building a war chest more than anything else. We went to the market, and the market was backfiring that very week. It started going up, up, up. We said, the hell with it. We didn't need it."

Some Washington financial companies are also feeling the pinch in the credit markets. Malon Wilkus, chairman and chief executive of Bethesda-based American Capital, said the company sold $338 million, or only about 70 percent, of the $500 million in corporate debt it wanted to place last month.

Wilkus said investors are demanding a higher rate of return on their corporate bonds. "We cleared a little less in this offering than we normally clear," he said. "There definitely was pushback. The market is more demanding."

The problems in the corporate bonds market began when the market for high-yield junk bonds, which are loans given to companies with poor or short financial histories, closed down early in the summer, a spillover from the mortgage mess. As Wall Street's credit problems worsened, panic gripped the markets and other parts of the bond market began to stall.

The market for investment-grade bonds -- or money lent to companies with great credit -- has virtually stopped for the past few weeks. Only companies with credit as good as the U.S. government, such as General Electric, have been able to get low-rate loans from the bond market.

If consumer spending drops, these companies could be hit by a double-whammy -- less money coming in through the cash register and no place to go for low-rate loans.

Several bond traders and company executives said in interviews that there was still a lot of fear in the markets, but that the problems should work themselves out in the fall.

If not, it could be a very harsh winter for corporate America.

"If corporations have to postpone their borrowing, it can have real economic effects," said Michael Decker, head of research at the Securities Industry and Financial Markets Association. "That's new investment that might get canceled, acquisitions that aren't happening, and real economic activity that might not take place."