Firms' loan terms tightening

The Philadelphia Inquirer (MCT) - Even as the Obama administration does everything it can to boost lending, many U.S. companies are having trouble handling the loans they already have.

Weak demand from consumers and other businesses is making it impossible for many companies to stay in compliance with their loan agreements, forcing them to turn to the lenders for relief.

But that relief _ which often means companies get more time to pay or are allowed to have more debt relative to their profit _ comes at a price.

Borrowers are facing higher fees and higher interest rates and, sometimes, are being forced to raise money to pay down a portion of their debt, experts said.

"Lenders are in a combative state. Wagons are circled," said Chris Donnelly, who tracks leveraged finance for Standard & Poor's Leveraged Commentary & Data.

As the downturn continues, more struggling companies are likely to be forced out of business or into bankruptcy. Tighter terms on a credit line were among the reasons cited for the demise of Philadelphia law firm Wolf, Block, Schorr & Solis-Cohen.

One expert said that what's happening was not surprising, given the cyclical nature of credit markets.

"What we're seeing now is a normal move towards conservatism," said Kevin M. Blakely, president and chief executive of the Risk Management Association, a banking trade group in Philadelphia.

"Banks can, and will, seek the best pricing and best underwriting standards they can get. When you're lending money, this is what you're supposed to do in order to ensure you can get the money back. Eventually, competition will heat up, driving pricing and underwriting standards back down."

When it comes to existing loans, banks are often negotiating new terms that give borrowers wiggle room, but with higher interest rates and other conditions, putting further pressure on already weakening earnings.

Companies that have recently gotten relief from lenders include NCO Group Inc., Quaker Chemical Corp., Resource America Inc., and Technitrol Corp.

NCO Group, a company that sells debt-collection and other services, last week announced amendments to a credit agreement governing a $573.6 million term loan and a revolving loan with $47.5 million drawn on it. The amendments allow NCO Group to have more debt relative to its diminishing earnings.

But to get the deal, some of the company's owners, including a private-equity affiliate of JPMorgan Chase & Co. and chief executive Michael J. Barrist, had to put up $40 million to pay down some of the debt and $2.5 million in fees.

In exchange, they got preferred shares.

Technitrol Inc., an electronic-components manufacturer that has been hard-hit by the global economic downturn, also recently negotiated less-restrictive financial terms from its lenders. For example, the company is temporarily allowed a debt level that amounts to 4.5 times more than its cash flow, up from three times cash flow.

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That and other changes came with a price: $2.7 million in upfront fees and an interest rate as much as 1.75 percentage points higher than it had before.

Despite the increase, Technitrol said its annual borrowing rate was below 5 percent at the current London Interbank-Offered Rate, the LIBOR benchmark used widely to set interest rates for corporations and even some adjustable-rate consumer mortgages.

The company, whose stock price has fallen from nearly $25 a year ago to $1.89 earlier this week _ down 18 cents, or 8.7 percent _ also agreed to reduce the size of its revolving loan to $175 million from $300 million, because demand for its products is down.

Higher fees on the unused portion of credit lines are another reason for companies to get rid of borrowing capacity they do not need.

Borrowers with solid BBB credit ratings had to pay a average fee of 0.42 percent for the unused portion of their 364-day revolving credit lines this month, up from 0.08 percent a year ago, according to Reuters Loan Pricing Corp.

That increase means a company with $50 million of unused credit on a revolving loan would now pay $210,000 annually, up from $40,000 a year ago.

"It's becoming very, very expensive to have this credit, to the extent that banks are willing to provide it," the S&P's Donnelly said.

Banks also have a reason to eliminate unused credit lines.

They have to reserve capital to support those lines, whether or not the money goes out the door, Blakely said. "Thus, it is not surprising that banks will seek to reduce loan commitments that are out there," he said, "especially ones that aren't being used."

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© 2009, The Philadelphia Inquirer.