Managing financial relationships in challenging times: research from Greenwich Associates turns up recommendations for companies needing credit and other services in a world with fewer banks.

• Author: Bennett, Jay
• Position: Banking

Improved prospects for the U.S. economy have yet to trickle up to the largest corporations, who amid rising consumer confidence and declining unemployment find themselves in the first half of 2002 struggling to maintain their composure as menacing clouds gather on their horizon. The ledger of troubles is long, and their nature bafflingly varied and complex.

One of the most unsettling developments for the large business community -- and one that our research consultancy, Greenwich Associates, has watched become more acute in recent years -- is the problem of obtaining credit. As bank directors grow more nervous about the status of their would-be borrowers, they have tightened already-taut credit reins and stiffened return requirements for large corporate borrowers. "Lenders are more prone to strongly request fee-based business," says David L. O'Brien, treasury operations head for the global information technology firm EDS.

Adds Michael L. McKeever, assistant treasurer for the Ethyl Corp., a chemicals business: "They are looking for opportunities to increase margins."

The crunch has become especially acute in the last year, particularly among the top 10 banks in the U.S., where willingness to extend credit as rated by corporate financial executives fell by more then a third in a single year (see chart on page 29). Behind this stark drop-off are a variety of issues:

* First, weakening corporate financial performance, accompanied by a rising burden of non-performing loans, has made banks more wary in extending credit.

* Second, banks are focusing more closely than ever on relationship profitability. Because bank capital is allocated based on risk-adjusted return on capital, bankers are less interested in "plain vanilla" lending unless more attractive ancillary business is also offered. Some lenders view credit as a "loss leader," to be used only as leverage to obtain advisory, underwriting or other high-margin business. One corporate finance manager who asked not to be named said his company had "caved on term structure and covenants." "Adequate return cannot be made on credit products, so ancillary fee business is a must, or else," he said.

* Third, widespread nervousness about lax accounting practices in the wake of Enron Corp.'s collapse and the uneven quality of financial disclosure has added an extra layer of caution.

* Finally, a consolidation in the number of banks serving the large corporate market -- the market segment most roiled by negative earnings surprises, rating agency downgrades and debt defaults -- has further restricted the supply of credit.

During the 1990s, companies were largely in a position to choose their financial service providers. With credit becoming a more scarce resource after a wave of banking...