How a credit crunch could squeeze the state
While it's getting tighter, money is still available. But will it get worse, and who is most vulnerable?
Will the turmoil on Wall Street spread to Main Street?
Last week's sell-off in financial markets spurred new concerns that the shake-out in US housing and mortgage markets will infect the broader economy and snuff out the six-year expansion. In particular, analysts worried about a credit crunch, in which investors and lenders get so spooked they stop lending and investing, cutting off capital businesses need to grow.
Massachusetts businesses know the impact of a credit crunch. During the recession of the 1990s, when New England banks collapsed under the weight of bad real estate loans, even well-established businesses couldn't find credit to expand -- or just survive. The credit crunch deepened that recession, the state's worst in the post-World War II period.
So far, there's no sign credit is vanishing here as it did in the '90s. Some are paying higher rates than a few months ago, but credit remains widely available, business officials said.
Still, access to credit remains a worry in Massachusetts, which has many older companies that need to retool frequently to meet global competition, said Andre Mayer, senior vice president for research at Associated Industries of Massachusetts, a business group.
"A lot of these companies are under pressure," he said. "If they need another round of financing to stay competitive, the availability of credit is an issue."
Here's a look at how the credit market crisis is affecting parts of the local economy:
Credit markets provide a major source of financing for commercial real estate. As with residential mortgages, investment banks buy bundles of commercial mortgages and sell bonds backed by the mortgages. In recent weeks, as residential foreclosures have mounted and bonds backed by high risk mortgages have become worthless, investors stopped stop buying mortgage-backed bonds.
"Culminating two weeks ago, you could not get a commercial real estate loan because so few investors were buying bonds," said Michael Berman, president of CWCapital LLC, a Needham commercial real estate lender. "Over the last week or so, people started to come back into the market, but it was like somebody turned off the lights."
Mark Schuster, chief executive of Bluestone Holdings of Newton, said his commercial real estate firm is buying an apartment building, but couldn't find financing through lenders who put together mortgage-backed bonds. Now, the firm is talking with insurance companies, pension funds, and commercial banks.
Schuster said the credit crunch could prove short-lived, with little impact on commercial property values. On the other hand, he said, "It's possible it might have a lasting effect."
Bruce Evans, a managing partner at Summit Partners, a Boston private equity and venture capital firm, said the deterioration in credit markets has made it more difficult to do these so-called leveraged buyouts. Buyout firms have to pay higher borrowing rates and put more of their own money into the deal, Evans said.
This combination, said Howard Anderson, a professor at MIT's Sloan School of Management, will likely mean lower returns for private equity investors.
Analysts said the market turmoil also could hurt returns of venture capital firms, even though they invest directly in young firms and don't rely on debt markets. Venture firms cash out through initial public offerings -- selling shares on public stock exchanges -- or selling them to other companies. If the current turmoil reduces the appetite for risk, it could become more difficult to do either, analysts said.
Banks say they have money to lend to small and midsize firms -- and want to lend it. Meanwhile, competition among local banks is keeping commercial rates steady.
"For the small and medium-sized business that wants to buy or build a $2 million facility, there's plenty of money out there," Pat Sullivan, chief executive of Sovereign Bank's Northern New England market.
Cristina Muise, a business consultant, recently helped a local landscaping company put together an $8 million financing package. The firm had loan offers from two banks and ended up paying prime rate, which banks charge their best customers. Muise, citing a confidentiality agreement, declined to name the firm.
"Any company with a good business plan, and approaching the right partner, they're going to be able to get the deal done," she said.
But a jump in corporate bond rates is unlikely to have much impact on the biggest firms. Years of strong profits mean they don't need to borrow.
EMC Corp., the Hopkinton technology company, for example, has reported double-digit revenue growth for 16 consecutive quarters. "The company has very strong cash flow, so we have not had to access the debt markets currently," said Mark Link, EMC's chief accounting officer.
"Events like this are going to happen," said Craig DuVarney, a certified financial planner in Concord. "It's part of investing in the stock market,"
Nan Sabel, a certified financial planner at Women's Financial Network in Bedford, gives her clients similar advice, but the wild swings are nonetheless nerve-racking, she said.
One of Sabel's clients, Jamie Brenner Gutner, of Westwood, said last week's roller coaster gave her "agita," but she's staying in the market.
"It's scary to think about," she said, "but I have to have some faith that I'm doing the right things and it will get better."
Robert Gavin can be reached at rgavin@globe.com. 