As Credit Tightens, Companies Curtail Spending, Expansion

CarMax said this week that it might curtail lending by its financing arm. It laid off 600 workers this month in an effort to save costs.
CarMax said this week that it might curtail lending by its financing arm. It laid off 600 workers this month in an effort to save costs. (By Chris Rank -- Bloomberg News)
By Steven Mufson
Washington Post Staff Writer
Friday, October 17, 2008

With bank lending windows slammed shut for the past month, countless companies -- from pizza delivery firms and auto retailers to big real estate firms and utilities -- are hunkering down to survive the freeze in credit markets and slowdown in the economy.

Hard-pressed to sell bonds or arrange new loans, companies are dipping into credit lines, cutting back on spending, making deals with cash-rich partners or postponing projects.

Bethesda-based hotel giant Marriott International, for example, said that for the first time since the Sept. 11, 2001, terrorist attacks and only the second time ever, it had tapped $900 million of its $2.4 billion line of credit. CarMax of Richmond, which earlier this month laid off 600 employees to cut costs, said Wednesday that it might also curtail lending by its financing arm. And Domino's Pizza, which says it is well-positioned to weather the crisis, agreed to let some of its hard-pressed franchise owners defer payments to the chain.

"It really feels like there's a bunker mentality in the credit community, and that goes all the way to Main Street USA," said David Brandon, Domino's chief executive.

Commercial and industrial companies are scrambling to take protective actions as it becomes increasingly clear that the nation may be heading toward a prolonged recession and that government intervention efforts, including the $700 billion financial rescue plan, will take time to help the rest of the economy.

Even though the Dow Jones industrial average popped up 401.35 points yesterday and crude oil prices dipped below $70 a barrel, new government data showed that industrial production in the United States fell in September by the most in almost 34 years. Hurricanes and a strike by Boeing's aerospace union helped drive down production at factories, mines and utilities by 2.8 percent -- and that was before the global financial crisis came to a head.

Ever-tightening credit conditions could put scores of indebted companies in danger of default over the next year, according to analysts at investment houses and credit agencies.

Standard & Poor's predicts that as many as 125 major companies could default on their debt obligations in the next year and that non-financial companies with speculative credit ratings -- and thus extremely high borrowing costs -- face the need to refinance $56 billion in debts by the end of the year and $175 billion more in 2009.

"Those companies are in distress or in urgent need of capital and don't have access to credit markets," said Diane Vazza, a managing director at Standard & Poor's.

Friedman, Billings, Ramsey Group, an Arlington investment firm, estimates that $138.2 billion in long-term debt is set to come due within the next 12 months for S&P 500 companies outside the financial sector. The interest rate on this debt averages about 4.7 percent, far lower than the rates the companies would be able to obtain now.

"With the tremendous effort put forth by the U.S. government to triage our credit woes, a growing question to us now is where else in the equity markets are other casualties likely to surface?" said David Khani, director of research at FBR.

One company facing challenges is Chesapeake Energy, an Oklahoma City firm that says it is the largest producer of natural gas in the United States. As of June 30, it had $11.7 billion in debt, and analysts say it might need to sell some of its prospects and production, as it did earlier this year in a deal with BP.

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