Credit Market Fall-Out #16 – Credit is Getting Tougher to Obtain and Keep

Another sign the credit markets are getting tougher, the banks are reining in credit, from the WSJ.

Banks and securities firms are trimming loans, especially to companies tied to the mortgage market. But it is a balancing act: Cutting back too far could make matters worse by accelerating corporate bankruptcies and causing more turmoil in financial markets.

Banks facing the prospect of taking on billions of dollars in buyout-related debt are starting to trim lending to companies that need to refinance loans or restructure their balance sheets.

As banks rein in riskier lending, companies could find themselves unable to refinance loans coming due or to overhaul their businesses. Some companies may be forced to seek bankruptcy protection, a development that would exacerbate bond-market turbulence.

Specifically, banks are worried some builders may come close to tripping contractual agreements that limit the levels of debt in relationship to their corporate net worth . . . .

. . . . Many builders haven't been boosting debt to a great extent, but their net worth is eroding because of a decline in home prices, triggering write-downs of their assets. That makes the ratio of debt to net worth rise.

The vast majority of a builder's net worth is tied up in the value of its land and home inventory. Banks were typically comfortable with builders' debt levels because land provided safe collateral. But that collateral is eroding.

"Clearly, this is such a cyclical sector," said Sue Berliner, a credit analyst at Bear Stearns. "But what's disturbing is that some of these guys have written off 20% of their net value."

If banks get skittish, Mr. Snider said they could reduce the size of the credit lines. . . .

Banks also are stiffening lending standards and becoming more aggressive in issuing margin calls, or requests for additional cash or collateral, from borrowers.