Credit Crunch on Main Street
Defaults on corporate loans have jumped, lenders to McDonald’s franchisees are strapped, and big names like GM are facing liquidity problems
by Matthew Boyle
The ripple effects of the week that shook Wall Street are now being painfully absorbed through nonfinancial companies across the nation, from carmakers to casinos. "Tightening financial stipulations have expanded to reach nearly all sectors," says Diane Vazza, thrifty superintendent of global fixed income investigation at Standard & Poor’s, which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP). "Screaming headlines about the fiscal sector might give more the misleading impression that nonfinancials are mercifully out of the line of fire. Nothing could be further from the conformity to fact. The heat will eventually be circulated."
A growing digit of companies are already feeling the heat. As of Sept. 9, 57 companies had defaulted without ceasing $45.3 billion of offence for the year, according to S&P RatingsDirect, up from 22 companies defaulting in all of 2007. (While not a bankruptcy, a default sets off clear dismay bells in all parts of a company’s fiscal health.) Of the 57, 45 are outside the financial industry. And more defaults are likely upon the way: Roughly 70% of nonfinancial companies urge a noninvestment or junk credit rating. S&P projects that the three-year cumulative default rate between 2008 and 2010 among nonfinancial firms with not rich credit will mount to 23.2%, the worst on record since 1981.
Discerning which firms will cave elementary is difficult, but S&P has identified 162 "weakest links," or companies in danger of defaulting over the nearest 12 months. It is the seventh direct month that the roster of credit-unworthy firms has grown. On that list are high-profile names such as United Airlines parent UAL, General Motors, Tribune, Six Flags (SIX), and Trump Entertainment Resorts.
The cash crunch has hit U.S. automakers and airlines distinctly hard. General Motors (GM), for one, announced on Sept. 19 that it was drawing down the remaining $3.5 billion of its $4.5 billion credit facility. Goldman Sachs (GS) algebraist Patrick Archambault said GM might necessity to raise as much as $8 billion to envelop monthly operating expenses of up to $14 billion. UAL (UAUA), meanwhile, is doing everything deficient of roaming through its cabins to look for absolve change. The Chicago-based carrier just tightened its weather miles credit-card deal with JPMorgan Chase (JPM) to infuse about $1 billion into the business, and it’s trying to unload old 737 aircraft. "Cash is monarch," aforesaid United Chief Financial Officer Kathryn Mikells at an assiduousness conference on Sept. 18. "In this unprecedented environment…the appropriate level of liquidity is even more critical."
Even the most iconic Main Street brands are not immune. Franchisees of McDonald’s (MCD) were told Sept. 19 that Bank of America (BAC) could not provide any renovated loans to pay for the equipment and remodeling needed for the rollout of of the present day coffee bars. "As of now, [Bank of America] is dependent on repayments to get additional funding capacity," said an internal memo obtained by BusinessWeek. "The bills are coming due, so the franchisees are turnery to the banks," says Richard Adams, a consultant who works with 300 McDonald’s franchisees. "But the banks are having their own problems."
McDonald’s prolocutor Walt Riker did not deny the Bank of America force yet insists that other banks are still disposed to lend.
