As Credit Tightens, Companies Curtail Spending, Expansion
Some Indebted Firms at Risk of Default

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.

"The combination of all these capital expenditures, having leverage and falling natural gas prices puts them in a position where they need to sell down some projects," Khani said.

Seeking to reassure investors, the company yesterday said it had arranged a $750 million credit facility with a dozen financial institutions. Chesapeake's stock bounced up 12 percent on the news, but the $18.35 price was just a quarter of its July 2 peak. (On Friday, the company said its chief executive had "involuntarily sold substantially all of his shares" over the previous three days to meet margin calls.)

Other companies are looking for infusions of cash. In the past, they might have issued new stock but with tumbling share prices such moves are currently unattractive if not impossible. Advanced Micro Devices, the heavily indebted semiconductor manufacturer, was fortunate to have concluded months-long talks with an Abu Dhabi state-owned technology investment company. It will unload $1.2 billion in debt, receive a $1 billion cash infusion, and have a commitment from the Abu Dhabi firm to invest as much as $6 billion over the next five years.

"It solves AMD's near-term cash crunch issues," an FBR report said.

Even before the recent crisis, tight credit was putting some projects on hold.

In San Diego, for instance, developers had for two years been planning to erect a $1.5 billion development known as Ballpark Village on 7.1 acres of land near the Padres baseball stadium. The developer's Web site calls it "largest contiguous and undeveloped land remaining in downtown San Diego."

It's going to stay undeveloped for a while longer. The project has been put on hold. Marriott, slated to operate a hotel in the complex, pulled out at the end of August, citing "the situation in the capital markets." Investors in other parts of the development have also been squeezed.

For other projects, the ramifications of the credit freeze aren't yet clear.

Two years ago, the utility Ohio Edison settled a federal lawsuit by agreeing to spend more than $1 billion installing pollution-control equipment on a coal-fired generating station in southern Ohio. It is partway through that project and was planning to raise $600 million this year to finance the next stage.

For now, those financing plans are on hold as the utility waits to see whether the near freeze in lending will come to a rapid end. Tricia C. Ingraham, a spokeswoman for Ohio Edison's parent, FirstEnergy, said "we're waiting."