Washington area firms are postponed borrowing when they can as money becomes increasingly costly and hard to find.
For the area's largest borrowers, such as the utility companies, availability is no problem, but the sky-high interest rates are making utility finance officers blanch and put off what borrowing they can until tomorrow.
To the extent they are unsuccessful and have to borrow now, those higher rates eventually will be passed on in a modified form to consumer as rate increase, adding to inflationary pressures later on.
For smaller firms -- particularly newer ones -- the money simply may not be there.
"We're having to curtail disbursing funds because our funds are tied to the prime and also because we seriously question the ability of a firm coming for new money to pay the rates," said George Williams, president of Allied Capital. This venture capital firm invests in and lends money to new firms here and elsewhere.
For larger firms, the money is there -- for a price.
"We need to sell debt and common stock in order to finance our construction program, but we're going to try to use the flexibility we have to try to stay out of the market until, hopefully, there is an opportunity for market conditions to improve-- whenever that is," said Lowell Davis, senior vice president for finance at Potomac Electric Power Co.
Pepco's 1980 financial plan calls for about $80 million in regular mortgage bonds (long-term bonds secured by the company's property), approximately $45 million worth of tax-free pollution-control bonds and approximately $45 million worth of common stock.
"We're still uncertain of the timing," said Davis. He said Pepco only last week parted with a relic of easier money and better days when a seven-year term loan a a percentage above prime but with a ceiling of 8 percent matured.
The prime is now 19 percent at some banks.
For all types of borrowing, companies are paying significantly higher rates today than a year ago. For instance, when Pepco last sold pollution-control bonds, it paid approximately 6.6 percent interest on the bonds, but similar offerings are now as high as 9.5 percent.
If interest rates stay up and utilities aren't able to postpone or curtail their borrowing because of the continuing need to fund operations, the price of money ultimately may be passed on to customers in rate increases.
"Rates today are geared to the average cost of capital for a historical period," said Davis. "That doesn't contemplate the rates we're seeing today."
"The higher interest has to be paid at some point, but because of the regulatory lag it won't come through in any increases in rates in the near future," said J. Wesley Boykin, vice president for finance for C & P Telephone.
C & P has plans to sell $75 million worth of debentures in early April at competitive bidding. Although the company isn't obligated to accept the offers if they are unattractively high, Boykin said the company doesn't anticipate backing away from its plans to borrow.
C & P is transferring some $75 million in short-term debt that is has accumulated over the past three of four years to long-term debt at more attractive rates, said Boykin.
"This may or may not be a good time," he said "We've been in a period over the years of gradually increasing interest rates, so that there have been other times when rates looked high that look pretty good now."
A similar issue by Ohio Bell recently paid slightly more than 13 percent interest, Boykin said. What C & P ultimately pays "may be higher than what we paid a couple of years ago, but for now it's cheaper," he said. Short-term credit now costs about 19 percent.
In addition, he said, "There is a practical point where people don't want to lend you any more short-term [money]."
One area company actually has been able to reduce its financing commitments. Marriot Corp. reduced commitments for credit by approximately $100 million within the last three weeks, said Treasurer Alfred Checchi
Checchi said that although the cost of carrying those commitments prompted the decision to cut them off, the move wasn't particularly related to the changes in the economy. Rather, he said, the company conservatively had built in more financing than it needed to cover a recent offer to buy back stock and for other endeavors. Once it was clear less financing was needed, the company normally would have cut back the commitments, he said.