A credit crunch in a satellite city?

Borrowers see tighter money; lack of local control may cut both ways
One Nashville borrower says tightening credit standards held up his company's bank deal for three months, forcing it to delay acquisitions and other growth plans.

Email | Print By E. Thomas Wood

01-22-2001 12:00 AM — Now we'll find out what Nashville's banks are made of.

As the national economy slows and corporate credit problems afflict many of the country's top banks, evidence is mounting that money is getting tighter in Nashville. Few signs point to a full-scale credit crunch -- a pack-mentality pullback by lenders everywhere -- but some local companies are already finding it harder to obtain the loans they want.

Bank lending standards have always fluctuated with changes in economic conditions. What sets this cyclical downswing apart is that it takes place in a city with no large banks to call its own. Nashville lost its last major bank with a local headquarters when Birmingham's AmSouth Bancorp (ASO) bought First American Corp. in 1999.

The banks that now dominate the local financial landscape -- AmSouth, nationwide powerhouse Bank of America Corp. (BAC), Atlanta-based SunTrust Banks Inc. (STI) and other out-of-towners -- would all insist Nashville customers are treated just as well now as they were in the old days of First American, Commerce Union and Third National. So far, there's no strong evidence to the contrary. But anxieties linger among Nashville's corporate borrowers.

Prime rates

The recent ordeal of Prime Office Products won't do anything to lessen those worries – though it's far from clear that a local bank would have treated this Green Hills-based company any differently.

Prime, which was formed in April 1999, is a roll-up company that buys business-to-business office-products distributors in order to create efficiencies of scale. After reaching annual revenue of $100 million in less than two years, Prime has been recognized as one of the fastest-growing companies in Nashville.

Last October, Prime approached its lenders at Bank of America about increasing and enhancing its existing credit facility, which was "in the mid-teens of millions" of dollars, according to CEO Paul Christians. "The bank looked at it and said, 'Hey, that's great,'" he recalls.

"A month later, they came back and said, 'We've misread the market. We've got a problem. There's been significant tightening in the credit markets, and we're going to have to make a series of adjustments.' We've been dealing with that literally through October, November, December and on into January."

Christians says after the company looked at "four or five other banks," it finally worked out a deal with BofA recently. "It’s reasonable; it's something we can live with," he says of the new loan package. "But it's almost identical to what we started with, although our performance has been beyond what we had indicated it would be.”

The delay caused Prime to put several pending acquisitions on hold and to back away from entering some new markets it had been considering. Christians points out that if Prime had waited until the original loan matured in April of this year, the situation might have been worse.

Christians does not fault the service of the local BofA officers who handled the loan dealings. “One of the things we've been pleasantly surprised with," he says, "is that their ability to understand and respond locally has been quite good." However, he did get the sense that they did not have the latitude to respond as he would have wished.

And he notes that one of the issues Prime had to deal with, in talking to bankers, was concern over the troubles of US Office Products Company (OFIS.OB), a company in the same business sector that is in deep financial trouble.

Though Christians says US Office has little in common with Prime, lenders at BofA may have been particularly sensitive to even a tenuous association. A SalomonSmithBarney investment report estimates that US Office owes about $900 million to its banks -- and says Bank of America is one of two major institutions involved in the shaky loan.

NashvillePost.com was unable to reach credit officials at the Nashville offices of Bank of America for comment on current lending standards (and officials would not have been at liberty to comment about customer relationships).

Where credit is due

Christians is not ready to call the current situation a credit crunch -- "but it's nudging right up there against it," he says.

He sees evidence that Prime's was not an isolated case. The CEO says he has quizzed venture capitalists at both of the firms providing equity capital to Prime (Massey Burch of Nashville and Brantley Partners of Cleveland), asking how the firms' other portfolio companies are dealing with bank credit these days.

"Their answer is: 'Everybody is struggling with it,'" Christians says. He sees tough times ahead for borrowers who are more dependent on bank financing: "For those who have had a high component of cash-flow lending, it's going to be a long day."

Gene Kirby echoes that sentiment. Kirby is president of Dialogic Communications Corp., a Franklin-based designer of interactive notification software. Dialogic relies mainly on equity funding – including an investment from Microsoft Corp. (MSFT) -- but maintains a line of bank credit as a secondary capital resource. It recently set out to increase that line from $2 million to $3 million.

"Two or three years ago, that was done within 30 days and without a great deal of work involved in it -- and there were several banks vying for the business," Kirby observes. "Now we're faced with something less than an excited, interested return to those phone calls.

"The different economic background is the reason. Banks are scrutinizing everything more than they did a few years ago. Good thing we haven't had to lean on that bank line. If we had been in another situation, it would probably have been pretty rough."

Local bankers offer differing points of view about the prevailing credit environment.

Mike Kane, SunTrust's senior credit officer for Tennessee, says his bank hasn't tightened standards at all. "Locally, we are approving credit very similarly to how we did six months ago, a year ago," Kane says.

"We haven't changed any of our underwriting criteria. The large corporate market around the country might be experiencing some tightening, but those companies aren't prevalent in our marketplace."

Kane says local borrowers should not feel disadvantaged by the fact that SunTrust has its main office out of state. "Decision-making here is decentralized," he says. "Virtually all of our loans are approved locally -- in fact, I can't think of any that aren't, that we deal with. We have a lot of decentralized authority."

Julian Cornett, executive vice president for credit administration at The Bank of Nashville, also says loan-approval standards have not changed recently in his shop. But he advances a claim often made by local community banks, offering it as an explanation for the tightening perceived by borrowers in the Nashville area:

"When you're dealing with those national or mega-regional banks, they change their focus in response to things they're experiencing in other regions of the country -- whether it's appropriate for Middle Tennessee or not. They do that across the board and react with a broad brush."

Even though The Bank of Nashville, which is a unit of Community Financial Group (CFGI), has not changed its credit rules -- and has "plenty of opportunities in the pipeline" to make new loans -- Cornett does believe that in the overall local marketplace, it's harder for small-business borrowers to get credit. "I would say it would be slightly more difficult today than it was six months ago," he says.

The Federal Reserve Board's latest Beige Book survey of economic conditions, released last Wednesday, draws similar conclusions. "Overall loan demand and credit availability remained relatively healthy," in the Southeast, the report stated, "but there continued to be signs of slowing, [and] lending institutions have become more selective in loan terms and covenants."

Big-bank blues

A recent spate of disclosures from large banks about bad loans has had little to do with Nashville's banks. That fact in itself shows that there is actually some benefit to being a financial backwater in the current environment.

The SalomonSmithBarney investment report issued earlier this month analyzed some of the larger troubled credits currently of concern to major banks. Large corporations often borrow from bank syndicates – groups of big banks that join together to fund large loans so that no single bank is exposed to the entire risk of a given loan. SSB's analysts predict that some $33 billion in syndicated loans to their "watch list" companies will go into default this year.

Of the regional bank holding companies with significant operations in the Nashville area, few show up with exposure to bad debts on the watch list – which includes no Middle Tennessee companies except Bridgestone/Firestone Inc. The authors suspect that Bank of America Corp., J.P. Morgan Chase and Co. (JPM) and Bank One Corp. (ONE) are exposed to risks in excess of $500 million from the embattled tire manufacturer.

The report lists AmSouth, Union Planters Corp. (UPC), First Tennessee National Corp. (FTN), SouthTrust Corp. (SOTR) and Regions Financial Corp. (RGBK) as each having little or no exposure to the troubled companies on its list. It estimates that SunTrust faces $123 million in defaults this year -- a relatively small number in this context. On the other hand, Bank of America faces a projected $2.8 billion in nationwide defaults; however, BofA dwarfs the other locally active institutions in overall size.

By contrast, the report predicts high levels of default for other regional banks – $719 million for First Union Corp. (FTU),which exited Nashville last year, $545 million for FleetBoston Financial Corp. (FBF), $253 million for Keycorp (KEY), and $243 million for Wachovia Corp. (WB).

It's all a function of who took part in, or put together, which loan syndications. According to the financial information service Portfolio Management Data, only 49 institutions were actively involved in leading and buying into major syndications in 2000 (a decline of more than half from the prior year).

The regionals don't necessarily play in that league. They do syndicate lending deals on a smaller scale, and it's possible that some will face serious defaults from those deals and from loans they have made on their own.

But the threat of major credit crises affecting the locally active regional banks, at least, seems limited. Since smaller business borrowers often catch colds when big ones sneeze, the lack of trouble on the immediate horizon at regional banks may be good news for some borrowers in Nashville.

Forebodings that linger

Still, there are seasoned observers who worry about future of a city that no longer controls much of its financial destiny.

A Nashville attorney who has lived through several downturns in the local economy recently speculated about how the next one may be different. (Since his firm has banks as clients, he preferred not to speak for attribution.)

"The next time there's a recession, what little lending is done will likely be done closer to home," the lawyer said. And in the eyes of bank officers headquartered far from Nashville, he said, "we are now no longer 'home.'"

With new evidence of a softening economy emerging daily, said this attorney, "the banking piece of it is what causes me the most concern for the future. When things aren't doing so well, you're generally more likely to apply hard formulas in the hinterlands -- and we're the hinterlands now.