Bank bailout to impact business, expansion financing

Deschutes Optical President and CEO John Granby said he hasn’t financed new equipment this year, and will hold off until the first part of 2009 given concerns about the U.S. economy. The company’s labs in Bend, Ore., and Boise use expensive equipment to custom-grind eyeglass lenses for optometrists and ophthalmologists.

“I’m waiting to see how this whole thing comes together,” he said Sept. 22, the first day Congress considered a sweeping U.S. Treasury-led plan to jumpstart the credit markets, largely by buying illiquid, mortgage-backed securities from banks. “Unfortunately, it seems to be politicized now.”

The federal government would buy currently illiquid mortgage-backed securities from banks over the next two years, would expand emergency lending to let commercial banks finance purchases of asset-backed paper from money market funds, and would buy short-term debt obligations issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The government would use a Depression-era fund to guarantee money market mutual funds. The national-debt limit would be raised. The U.S. Securities and Exchange Commission temporarily banned short selling of nearly 800 financial companies’ stocks.

 Cost of the plan was initially estimated at $700 billion. Some lawmakers last week said the plan should be expanded to protect homeowners, to limit executive compensation and to build in oversight of U.S. Treasury officials. A number of lawmakers called for taxpayer protections.

As for Deschutes Optical and its equipment, “we pretty much have what we need to finish out the year, new technology should be emerging in late ‘08, and we also will wait to see about the national economy,” Granby said.

While the lens-grinding industry weathers economic downturns well because consumers can shift to buying eyeglass lenses and reusing frames, a new piece of lab equipment can cost $300,000 to $400,000, he said.

Reasons to consider each purchase carefully go beyond the high price, Granby said. He said the financed portion of the purchase typically is secured in part by a personal guarantee, meaning the lender can come after the borrower’s personal assets if loan terms aren’t met.

“Right now no one has declared that this is a true recession,” he said. “It feels like a recession to the consumer.”

At King Machine, a Meridian dealer of computer-controlled machine tools to machine shops, President Larry McConnell said credit tightness hasn’t affected business volume this year.

But the specialized lenders who finance only machine tools – often requiring a personal guarantee - may be taking a harder look at a prospective borrower’s assets and financial condition, he said. A strong export market has benefited the manufacturing and machining industries recently, he said.

Finding capital to expand a business won’t get easier anytime soon, said Daniel Wiggins, chief investment officer of Talisker Investment Group LLC in Boise. He traveled to the New York Stock Exchange last week.

“It doesn’t seem to matter if you’re AIG, Lehman Brothers or ‘Bob’s Restaurant’ at the corner of Eighth and Main,” he said. “It’s becoming much more difficult to access capital to grow your business.”

Several big, now-fallen, financial companies used short-term loans to free up their own cash for investment, Wiggins said.

“When they got money, it just went out the door. Years ago, it didn’t make sense to hang onto that cash - they could get a higher return putting it somewhere,” he said. “Then, simultaneously, every single one of their avenues for getting capital evaporated. All of a sudden, no one trusted anyone else.”

U.S. Treasury Secretary Henry Paulson’s bailout plan would provide banks with cash to lend, although the plan currently focuses on large institutions, Wiggins said. Small and midsized banks, including regional banks and some regional thrifts, “might find themselves without access to capital.”

If small and midsized banks sell mortgage-backed securities to the federal government at a deep discount, they could come close to “undercapitalized” status, he said.

Idaho Department of Finance Director Gavin Gee last week said in a release that Idaho-chartered banks and credit unions remain financially strong, and largely avoided making risky mortgage loans and investing in currently illiquid mortgage-related securities.

“It’s going to take years for this to unwind,” Wiggins said, partly because of “the unknowns that all of these derivatives present.”

Derivatives, which derive their value from other securities, can be used for protection by multiple parties including bond buyers and bond insurers. Examples include interest-rate swaps and options to sell the security at a predetermined price.

The nonprofit Idaho Housing and Finance Association periodically issues bonds to buy qualifying mortgages from mortgage lenders. The association services the loans on behalf of investors. President and Executive Director Gerald Hunter said the mortgage portfolio’s delinquency rate has been at or below 5 percent, and that bonds sold several weeks ago found buyers.

“As is true for the overall economy, liquidity is becoming more difficult,” he said. “The capacity to find institutional buyers for some of our bonds has become more difficult.”

Tom Mihlfeith, development project manager with Eastbourne Investments, is based and Boise. Eastbourne and the Boise-based Retail West Properties partner in commercial real estate developments around the West.

“We are limiting our reliance on bank financing as much as we can,” he said. They are using land sales to fund infrastructure as demand warrants rather than financing large-scale infrastructure projects and taking a more speculative approach to lining up commercial occupants.

Lenders require more pre-leasing before they approve a construction loan for a multi-tenant commercial building, said Michener Investments partner Lawrence Ross, Boise. Finding tenants is tough now because of a shortage of businesses that are expanding or relocating, he said.

“Businesses without a strong balance sheet two to three years ago could find financing. Today they cannot,” he said. “Now if you have a strong balance sheet as an investor or small business, you can still get the financing you need to acquire or build a property. They (lenders) have strengthened their lending requirements, even for the strong. That has eliminated some of the weaker buyers that two years ago could have gotten it put together.”

 Rod Endow, Nampa-based manager and vice president of the community lending group at Northwest Farm Credit Services, said the institution’s cost of funds has gone up a bit, but not by enough to reduce demand for agricultural loans so far this year. Northwest Farm Credit lends based on the borrower’s ability to pay rather than just on a percentage of the property’s value, he said.

The number and total dollar volume of U.S. Small Business Administration-backed loans in the Boise district, which includes southern Idaho and part of Oregon, is down by about 15 percent from a year earlier, District Director Norm Proctor said. Last year produced record totals, and the subsequent downturn began in June 2008, he said.

Despite this year’s decline, “many banks are now really looking to us to assist them in helping some of their clients that may not have the credit score or resources they require” on conventional loans, he said. “Rather than turning them down, they are coming to us.”

***To contact the author, send e-mail to brad.carlson@idahobusiness.net.