TAKING CREDIT.

• Author: Maley, Frank
• Position: Financing growth in North Carolina - Brief Article

Only the fittest private companies can keep a grip on financing growth as banks get more tight-fisted.

When Raleigh-based BTI Telecom Inc. announced in June it would close three sales offices and cut 200 jobs -- 17% of its work force -- management said it was trying to "rationalize both cost structure and capital-spending plans to strengthen the company's financial position."

That didn't satisfy Rosemarie Kalinowski, a telecom analyst at Standard & Poor's. She downgraded BTI's secured-bank-loan rating and predicted that, without another major cash infusion, the company would run out of cash by year's end. According to Moody's Investors Service, it was burning $15 million a month.

BTI was racing to build a costly fiber-optic network, sprinting into new markets without bringing revenues up to speed in old ones. It had its eye on the finish line: an initial public offering it had filed for in July 1999. "They were counting on the capital markets or other types of private equity to support those plans," Kalinowski says. Then the IPO market and that for telecom stocks stumbled. In January, BTI withdrew its initial public offering.

Still, BTI managed to increase revenue by 4.4% in 2000. But bringing in $271.5 million only allowed it to keep pace with the North Carolina 100. It was No. 16 -- same as last year -- on the annual ranking of the state's largest private companies. Arthur Andersen LLP, which compiles the list for BUSINESS NORTH CAROLINA, ranks companies by their previous year's revenue. Perhaps more than any company on the list, BTI has been affected by the growing stinginess -- some would say prudence -- of lenders and investors around the country.

After ending 2000 with a $77.4 million loss -- and just $5.6 million in cash -- BTI turned to people with an interest in helping out: the New York investment firm of Welsh, Carson, Anderson & Stowe. In December 1999, Welsh, Carson had invested $200 million in BTI. In January, it added $10 million. In April, it lent BTI $50 million and upped its equity stake by $40 million, getting control of the board in the process. In March, BTI got an $89 million loan from a syndicate led by one of its existing creditors, GE Capital.

Then came the cost cutting. "That's like a Catch-22," Kalinowski says. "When you do that, it's difficult, especially when you're reducing your sales force, to increase your revenues. Of course, you need revenues to grow cash flow."

The goal of most North Carolina 100 companies is not to go public. But for those who don't rely solely on cash flow, getting money to grow is becoming increasingly difficult. "Companies that may have had a high debt load start getting scrutinized more," says Alan Day, a principal in Arthur Andersen's Charlotte office.

Banks -- the primary source of debt financing for most private companies -- are wary because regulators have been pounding on them about loan losses and slack lending policies for more than a year. And with good reason. Nationally, banks' bad-loan ratio went from 0.97% in the first quarter of 1998 to 1.2% this year. It was worse in North Carolina, rising from 0.73% -- well below the national average -- to 1.37%.

To shore up their own balance sheets, banks are increasingly basing the interest rates they charge on financial performance. Over much of the last decade, competition pushed banks to price most loans low. But as losses increase, "you're seeing us and other banks do a better job of pricing for risks," says Bill Wilson, Bank of America's commercial-loan executive for the Carolinas. "The very strongest buyers are going to continue to borrow at very favorable rates, but the companies that have declining trends are going to see their prices increased as their credit quality deteriorates.

"Banks look more now at how much debt a company has vs. its cash flow, disposable cash for debt repayment, than they really do equity because big balance sheets don't get you paid back. It's the cash flow."

Textile companies -- battered by cheap imports -- are getting more scrutiny than those in most industries. Trucking companies and manufacturers, in general, are also under a microscope. "Most of our manufacturing customers are not doing as well as they were," Wilson says.

Not all companies are hurting. Atlantic Corporation of Wilmington, a distributor of bleached cardboard and other packaging materials, landed No. 29 on this year's North Carolina 100. It has borrowed money for inventory and equipment and to continue its integration of Greensboro-based Henley Corp., a paper-products distributor it bought in 1999. "The acquisition itself has a cost, but...