Bank Crisis Could Hit Small Cos.

ELLIOT ZWIEBACH

The economic upheaval on Wall Street could have repercussions for some smaller operators, industry analysts told SN last week.

While larger chains with solid lines of bank credit should not experience any serious impediments to the way they do business, smaller players might hit some bumps, they said.

“If a company has an existing line of credit with a bigger, well-capitalized bank to finance growth or ongoing working capital needs, then it should be in good shape,” Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, said. “But if a company has plans to set up a new relationship with a bank or is hoping to finance its first line of credit, that will be difficult, and it could force some small chains to find bigger chains to partner up with.”

A New York analyst, who asked not to be quoted by name, said smaller operators might consider leasing new stores rather than working with banks to finance new construction.

“Most small supermarkets already work with the real estate market and lease their stores, so they don't have to raise a lot of money when they want to expand,” the analyst pointed out.

“But I'd be surprised if a bank was not willing to lend money for working capital, especially on a secured basis, and I can't imagine a business as fundamental and stable as the grocery business having trouble getting financing for operations — unless the retailer wanted to make an acquisition or to convert a leased store to an owned location.”

For Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., the question of whether small operators will face new hurdles may become moot if Congress passes the plan suggested last week by Treasury Secretary Henry M. Paulson, “because it would unfreeze the banking system and liberate some banks to begin loaning money again,” he explained.

“Paulson's goal is to free up capital so it is available for business. But we don't know at this point if any losses on the books would be considered toxic assets that the government would not be willing to buy nor how much those losses would reduce the book value and thereby affect their ability to lend money.

“On the other hand, supermarkets with good credit and smart financial people have probably already secured lines of credit, so they won't be desperate. And companies can turn off some capital projects if necessary.

“But one of the great strengths of this business is that it throws off cash, which enables many companies to be self-funding.”

Gary Giblen, executive vice president of Goldsmith & Harris, New York, had a more negative view than his peers, suggesting that bank borrowings by supermarkets “could be very much affected.”

For example, he said, if banks tighten the requirements in their agreements with some smaller companies, those companies could default on their covenants.

“If a lender sees a company struggling, it could decide to call in the loan and opt to collect 80 cents on the dollar rather than letting the debt accelerate, which could lead some companies to declare bankruptcy,” he said.

“What I think will happen is all retailers, including the larger operators, will pull back square-footage expansion and decide to grow share by investing in the economy at a time when others, who are more leveraged, can't.”