Sunday, October 19, 2008

Credit trickle slows construction

Local cities and counties are delaying millions of dollars in bond issues, waiting for municipal debt markets to calm down. Meanwhile, some local businesses are putting off expansions or new construction projects because of trouble getting loans.

Despite actions taken in recent weeks by the federal government to head off a deeper economic crisis, the impact of the credit meltdown still is being felt on Main Street.

Williamson County, the city of Franklin and Rutherford County are putting off a combined $132 million in bond issues to fund projects such as schools and government office buildings.

As a result, the city of Franklin is dipping into a reserve fund to complete its new police headquarters under construction. The Williamson County schools have put off construction of a new elementary school in the community of Spring Hill.

None of those governments delaying raising money have canceled projects for good, and many observers expect the municipal bond market to improve in time.

But no one is sure when that will happen or what the long-term impact could be on borrowing costs and interest rates.

"Our financial advisers are all advising us not to even consider going to market now," said Franklin finance director Russell Truell. "My big concern was what will be the cost of capital?"

Lenders are more picky

The credit crunch has also hit private businesses. Rob Shuler, managing partner of All-American Holdings, a Nashville-based private equity group, said interest rate costs have increased a total of 27 percent in recent weeks for a specialty chemicals manufacturer his firm owns in the Northeast.

"I was thankful that I still got the money. I was more concerned that they might not be willing to give me the money than about (the) cost of it," Shuler said.

A year ago, 10 lenders were willing to make a revolving credit loan to the same company.

"Good companies are still getting financed, but the market is looking closer at those deals and is more picky," said Sam Belk of Wells Fargo's regional commercial loan office in Nashville.

For some companies, financing is still available, but at a higher cost. Lenders are seeking 2 to 3 percentage points more in interest than a year ago, said James P. Craig, executive vice president with Health Care Finance Group Inc., a lender to health-care companies.

The pressures have caused delays in some commercial real estate projects.

Franklin-based MRCO LLC, which owns 85 Taco Bell restaurants in the Southeast, has put on hold for up to a year plans to build two replacement locations and two new ones, including one in the Nashville area. The reason: it was too difficult to obtain loans.

"Those two new ones would have obviously created new jobs," said Michael Shahsavari, the group's chief financial officer and a partner.

Bond market in disarray

Some of the biggest impact has been seen in the municipal bond market.

Several big investment firms that bought municipal bonds and then sold them to investors have either disappeared or cut back on their work force.

Wall Street giant Lehman Brothers filed for bankruptcy this fall, and UBS, a major international bank, exited the municipal bond business earlier this year. Likewise, investors have been holding onto cash or government Treasury bills, feeling too anxious about the economy to buy long-term municipal bonds.

"There is so much uncertainty with the government's bailout plan and who is going to be our next president, investors are sitting on the sidelines,'' said Mark McBryde, executive vice president of public finance for investment bank Stephens Inc.

With so few investors, interest rates have been rising.

The yield on 30-year AAA general obligation bonds was 5.92 percent Thursday, up from 4.84 percent just one month ago, according to Thomson Reuters' Municipal Market Data.

For a $40 million bond issue, that could add hundreds of thousands of dollars to yearly borrowing costs.

With higher interest rates, lots of municipalities have been putting off bond issues.

Since Sept. 18, a total of 201 bond and note sales totaling $11.25 billion have been rescheduled, postponed or canceled, according to industry publication The Bond Buyer.

Rutherford County decided not to pursue a $44.6 million bond issue planned for this fall.

The county will use its own funds or borrow short-term to start planned projects, including a new elementary school as it waits for the bond market to improve.

New school put on hold

Williamson County has put off a $42 million bond issue planned for this fall, hoping the bond market picks up early next year.

The Williamson County schools wanted $125 million last month for construction projects but got approval from the county commission for just $17 million instead.

As a result, the school district will put off building an elementary school in Spring Hill and put some portable classrooms at existing elementary schools instead, said the schools' director of budget and finance, Leslie Holman.

Some Williamson County schools could be forced into year-round schedules if county and school officials can't find a balance between the district's growth and
the county's finances, schools director Becky Sharber said.

"I don't think this is going to kill projects,'' said Rick Dulaney, a managing director at investment bank Morgan Keegan & Co. in Nashville.

"I hope this is temporary."

He thought some projects might get delayed in the midst of an economy that could benefit from more construction jobs.

"It's not good for the economy for all this to get shut down,'' he said.