Rescue Loans: Businesses Feel The Crunch

Loans to ailing businesses are becoming a rarity. The credit crunch that has hit the consumer across the country is now biting businesses on the brink driving them into bankruptcy — as well as those on the rebound out of bankruptcy.

Last June, we visited this issue and businesses were not seeing much difficulty placing loans to “rescue” their operations — even when it looked like a high-risk bet. But today’s Wall Street Journal reports the squeeze has caught up to many industries and the funding is no longer there. This forced retailers Sharper Image and Lillian Vernon Corp. into bankruptcy yesterday.

It has also bitten into companies that have been through bankruptcy and had bright prospects. Solutia, the chemical maker based in St. Louis, has been in Chapter 11 bankruptcy since December 2003, after an ill-starred spinoff from Monsanto. The company turned around in Chapter 11 and had secured $2 billion of “exit financing” from Citigroup, Goldman Sachs, and Deutche Bank last Fall. Unfortunately for Solutia, even after committing to make the loan, the syndicate backed out of the deal. Solutia has sued and, unless a deal is reached, is going to trial today.

The $6 billion exit financing syndication for Delphi is similarly in peril. Although hope springs eternal that there will be a way to make this one fly, the reality is that credit markets are making it very hard for even well-run companies with improved balance sheets to get needed funding.

Inevitably this will put pressure on companies to keep their operations lean, certainly reducing hiring and likely continuing payroll reductions. With fewer jobs and more layoffs, consumers are only going to be squeezed harder for now.