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The Wall Street whirlwind will make CFOs more conservative and access to capital more difficult, experts predict.
Alix Stuart and Sarah Johnson, CFO.com | US
September 15, 2008
Jeffrey Alfano, CFO of Oppenheimer & Co. Inc., has been watching the effects of the credit crunch on his industry, particularly on the most heavily leveraged investment banks. "Deteriorating asset values and increased borrowing costs, coupled with slower capital markets activity, has caused a serious strain on capital at some of these firms," he says.
That strain, of course, which this weekend brought down two of the largest U.S. investment banks, has CFOs looking more carefully than ever for danger signs. While Alfano's firm does not have any "significant exposure" to the types of securities — like mortgage-backed financial products — that have caused the U.S. financial system to falter, Alfano and other CFOs are feeling some of the effects. "We have not been immune to the increased borrowing costs that our sector is experiencing," he says.
Outside the financial services business, too, CFOs are being increasingly pinched by the credit crunch as they have a harder — and costlier — time obtaining financing. During the past few quarters, lenders have become more conservative, says Peter Falvey, cofounder of tech investment bank Revolution Partners.
And that trend isn't likely to abate in the wake of the bankruptcy filing of Lehman Brothers and the sale of Merrill Lynch to Bank of America. After a weekend of negotiations between top executives and regulators, Lehman filed for Chapter 11 protection, and Merrill confirmed its $50 billion sale to BofA. In effect, months after the implosion of Bear Stearns, the U.S. pool of large investment banks has dwindled to just two.
As he was mulling Monday morning's news, William Whitt, managing director of finance practice at the Corporate Executive Board, predicted that within the next 12 to 18 months "the capital base of the banking sector will be much smaller than it is today, and therefore there will be less credit available."
As it is, banks already are downsizing companies' revolving lines of credit. As CFO.com reported last week, banks have been cutting their nonactive commercial lines. Merrill Lynch, for example, reported that its unused lines dropped by 25 percent compared to last year.
"Many companies will not be able to count on accessing the full extent of their credit facilities — thus companies will need to be extra-conservative in their liquidity analyses to ensure that they maintain sufficient liquidity to get through a deteriorating economic environment," Whitt says.
CFOs outside the financial services arena are not yet ready to predict how they will be affected by the investment banks' troubles. But they are paying careful attention.
"We're really not that exposed to what's happening but of course we're concerned," says Joseph Euteneuer, who just joined Qwest Communications International as CFO. "Like everyone we don't want interest rates to go up or access to capital be more difficult to obtain."
Kate Plourd contributed reporting to this article.