Banking & Capital Markets

Creditors Shying Away from Smaller Companies

Survey says light manufacturers, industrial distributors most likely to get loans; tech start-ups least likely. Plus: Here come the vultures.
Joseph McCaffertyNovember 5, 2001

Managers at small and midsize businesses may find it more difficult to get loans in the near future, according to a recent survey of commercial banks and finance companies. Forty-two percent of lenders said that going forward, they would be less likely to lend to middle-market companies and small businesses.

The Phoenix “Lending Climate in America” Survey also indicated that most lenders think a recession is imminent and that a recovery is at least a year away. “The more unsettled the economy is, the more conservative lenders will become toward markets they perceive as being less stable,” says E. Talbot Briddell, president of Phoenix Management Services, a Philadelphia-based turnaround management specialist that conducts the quarterly survey.

Lenders named only two industries — light manufacturing and industrial distribution — as attractive sectors for creditors this quarter. Half of the respondents said service companies were also appealing to lenders. Start-ups, technology companies, and retail businesses were considered “unattractive” by lenders.

Creditors also reported plans to tighten loan structures on all but the smallest facilities. More than half of the lenders surveyed (53 percent) said they would increase the spread and fee structure on loans in the $1 million to $5 million range. “Loans in this range have probably been the most competitively sought and priced by lenders recently,” says Briddell. “The tightening suggests that pricing in this competitive sector is finally catching up to the rest of the market.”

Ninety percent of respondents expect further Fed Funds rate cuts by the Federal Reserve Bank. About half of the lenders said the economy will begin to improve during the second half of 2002, but a quarter of those surveyed said a recovery will not occur until the first half of 2003 or later. “Lenders were already skittish following the steep economic decline of the past year,” says Briddell. “The events of September 11 have diminished their confidence and dimmed their prognosis for recovery.”

Flying Lazy Circles

While capital is tough to come by these days, vulture funds continue to grow. Managers of such funds specialize in purchasing equity stakes and assets of struggling companies. The most recent entry into the vulture game could come from C.E. Unterberg. Management there is said to be contemplating a $50 million vulture fund to take advantage of beaten-down valuations in the tech sector, according to a report in Corporate Financing Week.

Last year Qualcomm Inc., a San Diego-based wireless communications giant, formed Qualcomm Ventures to capitalize on weakening share prices in the telecommunications sector. In September the fund acquired a minority stake in AirPrime Inc, a Santa Clara, California-based wireless components manufacturer that raised $40 million in a Series C round. AirPrime’s valuation, while not disclosed, is well off from previous rounds. Qualcomm Ventures completed six other deals, but managers at the corporate venture operation are looking for more investment opportunities. All told, Qualcomm Ventures is looking to invest about $500 million over the next four years.

A number of others are pouncing on the chance to pick up assets on the cheap. Kohlberg Kravis Roberts & Co. set up a venture with Accel Partners in July to buy out telecom companies. And Hicks, Muse, Tate & Furst Inc., Thomas Hicks’ leveraged-buyout firm, is putting together a string of bankrupt brands — Swanson, Open Pit barbecue sauce, and Vlasic pickles — to build a new franchise called Pinnacle Foods Corp.

Andrew “Flip” Flipowski, founder of Platinum Technology International, has purchased 29 troubled companies and merged them into his Divine Inc., an Internet conglomerate. Among the troubled companies Flipowski has recently purchased: Open Market Inc., a Burlington, Massachusetts-based E-business software company, for $43 million, and Eprise, a Framingham, Massachusetts, content management specialist, for $54 million. Flipowski bought both companies for a small fraction of what they were valued at during the height of the Internet boom.