A growing number of American businesses are altering ther money-raising plans because of continuing turmoil in the long-term bond market and because of skyrocketing interest rates.
At the same time, some bankers are beginning to worry that interest rates are now so high that some companies will have trouble paying for loans and that the situation will get worse if the economy slides into a recession.
John F. McGillicuddy, chairman of Manufacturers Hanover Trust Co., said he questions the ability of "smaller and larger corporations to absorb these punitive rates." The prime rate is already over 16 percent at most of the nation's banks, and most analysts expect it to hit 17 percent shortly. Nearly all but the top-rated American companies pay higher than the prime.
Not only short-term rates such as the prime are rising. Long-term interest rates -- which companies must pay for 20 or 30 years on their bond offerings -- are rising even faster. But even with long-term rates at record highs, investors are becoming increasingly wary of committing their funds.
As a result, many companies either are withdrawing from the bond market and hoping rates come down, or changing the terms of their offerings in an attempt to attract investors:
Texas Oil and Gas Corp. planned to sell $125 million of 20-year bonds and use the proceeds to pay off short-term borrowings and to finance oil and gas exploration. "We postponed the offering. We're waiting to see where the market stabilizes. In the meantime, we'll continue to rely on our banks," said Hamilton Schrauff, vice president of the Dallas company.
Household Finance Corp. called off its sale of $200 million of seven-year notes. "We're not really willing to lock ourselves into those kinds of rates for seven years," said Glen Fick, vice president. Instead, Household will borrow 200 million more than it planned to in the so-called commercial paper market, Fick said.
Pacific Telephone and Telegraph Corp., which planned to sell $200 million of 30-year bonds and $100 million of eight-year notes on Thursday, totally revised its offering because of investor reluctance to buy the bonds. The San Francisco utility will sell $100 million of its 30-year bonds -- and pay 15.55 percent -- and $200 million of its eight-year notes at 15 1/8 percent.
Commonwealth Edison cancelled a planned note in January because of the unsettled markets, according to Robert Schultze, vice president for finance. But the Chicago utility has to raise $900 million for plant construction this year and "will probably have to do something in March," Schultze said. The company is selling stock next week. Like Pacific Telephone's debt offering, however, Commonwealth's will "have to be shorter and in smaller amounts" than the utility prefers, he said.
Utilities probably are hit the hardest by bond market debacles -- interest rates on bonds have risen by more than 4percentage points since the start of the year. That means that for each $1 million of bonds issued for 30 years (forgetting that companies usually have the option of "calling" them before expiration), a company can expect to pay 1.2 million more in interest than if it issued the bond Jan. 1.
Electric utilities have long-term projects they have little choice but to build to satisfy customer demand 10, 15 or 20 years from now. The life of the loan taken out to finance the project "ought to be related to the life of the project," said John Thornton, executive vice president of Consolidated Edison of New York.
"It looks to me like the bond markets are moving to adopt the European style of financing, where long term is 10 years, not 30 years," Thornton said. "If that happens, it will be much more difficult for utilities." Con Ed doesn't plan any borrowings this year.
Wesley Boykin, treasurer of Chesapeake and Potomac Telephone Co., said C & P plans to sell $75 million on long-term bonds in early April and doesn't plan to sell any of that amount in short-term securities.
"We found in the past when we sold a couple of split issues (some long term, some shorter) that when time came to refund the short issue, we paid more than if we'd gone long term in the first place," Boykin said.
James R. Van Wagner, vice president of General Motors Acceptance Corp., said that although industrial borrowers, who go to the market for a one-shot item can change their borrowing plans significantly, companies like his that are in the money markets almost daily have trouble making major modifications in money-raising plans.
"We did a little postponing last fall (when there was a similar, though not so protracted, rise in bond rates), but you can only postpone long-term offerings or utilize other kinds of funds for so long before you get your debt structure out of balance and create new problems for yourself," Van Wagner said.
Businesses that rely on short-term loans to finance their inventories -- or those that are avoiding the long-term markets and borrowing short term from their banks -- could well face a serious cost squeeze themselves.
Roger Smith, executive vice president for finance of General Motors Corp., said that many automobile dealers are being pressed by interest rates of 17 percent of 18 percent or more. Dealers have to borrow to finance their cars in stock.
"If they cut their inventories, many will lose sales because they sell primarily out of stock," Smith said. In the meantime, though, they are being squeezed because the costs of financing those inventories are rising rapidly at a time when car sales are falling, he said.
The problem auto dealers face could be spreading to other industries.
"A lot of companies will sail right through," said Manufacturers Hanover's McGillicuddy. "But many other companies not only face business prospects that are not that good, they also have margins (the difference between the cost of production and price) that aren't sufficient to absorb these high rates."