Some Local Lenders Unshaken by Credit-Market Quake
While the Era of Easy Cash Has Ended on Wall Street, Many Small Banks Have Money to Lend

By Thomas Heath and David S. Hilzenrath
Washington Post Staff Writers
Monday, September 3, 2007

Turmoil in the credit markets has wounded some of the biggest titans of the financial world, but the little guys at the neighborhood bank are, for the most part, doing just fine.

The big deals have made headlines: A recent spike in borrowing costs forced Home Depot to knock nearly $2 billion off the sale price of its internal supply unit to a consortium led by District-based Carlyle Group.

Another Washington area firm, Allied Capital, which invests in small- and mid-size businesses, recently had $20 million fall from the sale price of one of the companies it finances, largely because of the rising cost and scarcity of credit.

Then there are banks like Virginia Bank of Commerce and the Burke & Herbert Bank and Trust of Alexandria, both of which have largely been immune to the recent upheaval in global finance because their loans are backed by customer deposits and not by more complex debt instruments favored by major corporations.

"What's happening on Wall Street has very little to do with what's happening on King Street" in Alexandria, said E. Hunt Burke, president of Burke & Herbert. "We have money to lend."

Bernard H. Clineburg, of McLean-based Cardinal Bank, said the credit market for small businesses is "thriving."

The segments of the credit markets that have suffered are those that relied on hedge funds and other big investors to buy debt -- such as corporate bonds and risky mortgages -- that had been sliced and diced and packaged into securities. A meltdown in subprime mortgages rippled through the financial markets, ending the era of easy money that until recently had fueled a steep run-up in housing prices and an extended binge of leveraged buyouts.

The market for investment-grade bonds -- or money lent to companies with excellent 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.

"What we have is a systemic debt crisis affecting the big borrowers like the brokerage firms who are attempting to sell mortgages and commercial paper to hedge funds, pension funds, life insurance companies and foreign lenders," said Dick Bove, a financial strategist with Punk Ziegel & Co. "However, since small- and medium-sized banks are funded by deposits, they have no difficulty obtaining the money needed to lend to mid-sized companies."

When the Home Depot deal was announced, the company said that it would sell the unit for $10.3 billion to a consortium of private-equity firms headed by Carlyle. But the home equipment giant had to restructure the deal because banks were having difficulty finding buyers for the billions in bonds to finance the sale. The hedge funds and pension funds who would purchase the bonds wanted higher interest and greater assurances that the debt would be paid.

After weekend-long negotiating sessions last month between Home Depot, Carlyle's consortium and major banks, the Atlanta-based home-improvement company agreed to lower the price to $8.5 billion so there would be less debt.

Raising money in the commercial paper market, a key source of short-term loans for companies, has also proved harder and more costly.

In particular, commercial paper backed by assets such as mortgages has had a harder time finding buyers. As a result, the cost of borrowing has gone up for even the highest-rated companies.

Some Washington area companies have felt the pain. Capital One Financial of McLean, the largest independent U.S. credit card issuer, had to promise investors that it would pay a higher interest rate on the $1.5 billion of 10-year notes it recently sold than what it paid on a similar debt issue two years ago. Capital One spokeswoman Julie Rakes pointed out, though, that the earlier rates "were previously all-time lows."

William L. Walton of Allied Capital said the shakeout in the credit markets won't be obvious until after Labor Day weekend, when the August vacationers return from their beach houses.

"Even though people have been on their BlackBerrys on the beach, it's still too early to see how much impact there will be on the board," Walton said.

But some analysts said banks that rely on deposits to make loans will generally not have to charge their business customers more to borrow.

"The banks are pretty immune from the type of problems the finance companies have had because they are not dependent on the money markets, commercial paper markets and other market-driven sources of liquidity," said Gary Townsend, a financial industry analyst with Friedman, Billings, Ramsey Group.

John Delaney, chief executive of Chevy Chase-based CapitalSource, said the local banks unaffected by the turmoil will be able to grab market share from the bigger Wall Street lenders.

"The most hard-hit will be borrowers whose debt comes from the capital markets and is highly leverage-sensitive such as [leveraged-buyout] finance and commercial real estate," Delaney said. "Traditional bank lending is less affected. So small businesses will not be as affected."

Mike Fitzgerald, president of the Bank of Georgetown, said he has seen no letup in the appetite for small-business borrowing, nor has he seen an increase in costs.

"In my world, for the business borrower in the local community, there is no big increased cost," Fitzgerald said.

Also working in favor of small businesses here is a robust local economy.

"Until you see the economy slow down and default rates among those companies start to move up, banks will be eager to lend to them," said Wayne Hunley, PNC Bank's executive vice president for corporate banking in the Washington area. "And right now neither of those things is happening."

Staff writer Tomoeh Murakami Tse contributed to this report.

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