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CREDIT CRUNCH LIKELY TO RETURN SOON

Now that the banks have regained their senses and have returned to the days of cool calculation regarding how they disperse their money, we can all heave a sigh of relief – safe in the confidence that all is well in the world of the financial community. Well, maybe not. At least not for those companies that may have encountered some issues in the last few months as far as their business performance is concerned. A report from S&P backs up some earlier assessments from other ratings groups that states that companies that are not rated very highly by these agencies will have a difficult time getting the financing they will need in the next few years.

In the next few years there will be a need to refinance over $1.7 trillion in an environment that will be far more hostile to the finance world than when these loans were made in the first place. The businesses that will be the most vulnerable will be those that are in sectors that are still waiting to see their consumers come back to life. The consumer is still on the sidelines and that will have a deleterious impact on retail, restaurants, entertainment and leisure. These struggling sectors will in turn impact the manufacturers and service sectors that are engaged with these sectors. 

Retail and restaurant businesses are especially sensitive to the moods of the consumer and there is only preliminary evidence that the consumer is starting to shake out of their lethargy. The amount of debt that needs to be refinanced by this sector in 2011 is $8.9 billion. In 2012 there will an additional $12 billion to be dealt with and on 2013 there is yet another $17 billion maturing. The numbers are even worse in the entertainment and leisure fields. There is a debt load in 2011 of $17.7 billion and in 2012 there will be additional $36.5 billion and a massive $50.6 billion more maturing in 2013. Given the present economic situation, there is no way that these sectors make enough money to cover these obligations and that means that these companies will be forced to turn to financing. Good luck. The banks are demanding the kind of fiduciary responsibility they should have been demanding all along but now the vast majority of the companies that need help are in far worse shape than they were in when they received their original funding.

Analysis: This situation creates a real dilemma for the economy as a whole. These are the companies which will be counted on to make a dent in the unemployment rate and that is not going to be easy if they are struggling for their very survival. The banks will have little flexibility in their response given the new reality of the financial world. The ratings agencies have found religion and will not be issuing favorable assessments unless there is ample justification to do so and the banks will be under the gun to exercise real caution in terms of who they lend to. The companies that will be seeking to refinance will be in far poorer shape than they were when they asked for the original loan and more will be turned down than ever. This does not bode well for the expansion of job growth in the next few years and by most estimates there will be a wave of bankruptcies as early as 2011 and certainly by 2013. Some sectors have already started to feel the impact of this financial situation – commercial real estate has been there for some months and the construction industry has been hammered by the financial reality already.  Courtesy of Chris Kuehl, Armada Corporate Intelligence.  Chris Kuehl is a BIIA Board Member

BIIA Newsletter June II – 2010 Issue

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