The deal seemed to be sewn up. A large industrial developer had been cleared for financing to build a 600,000-square-foot distribution center in the Northeast. The agreement called for the developer—who declined to be identified—to put down 20 percent of the loan in cash.
At the last minute, the situation changed. The lender demanded an additional $1 million in cash to approve the loan. The developer, a well-capitalized concern, was able to pay up, and the transaction closed as planned.
Others who find themselves in similar circumstances may not be so fortunate. Although capital is available and ample, lending standards have tightened and financing terms have become less favorable. Companies that once relied almost exclusively on debt financing may find projects delayed or postponed unless they pony up more equity.
A tougher lending climate could trigger an unfavorable ripple effect across logistics and distribution operations, experts contend. "Not only will it require more money to buy the buildings, it will require more money for the rackings, the forklifts, and other types of assets. The barrier of entry into the market will be raised," says Steve Blau, director of corporate services for NAI Mertz Corporate Services, a Mount Laurel, N.J.-based supply chain and site selection firm.
A shock felt 'round the world
The impact of tighter credit is likely to be felt across the globe. Jim Smith, editor of the London-based magazine Jane's Transport Finance, wrote in mid-October that while bankers will complete deals they have already agreed to, they will not commit to any new lending for at least the next three to six months. Even after capital markets have stabilized, banks will agree to lend a maximum of 70 percent of a transaction's value rather than the traditional 80 percent, Smith predicted. This new regimen will apply worldwide, will cover all classes of supply chain assets, and could signal a permanent change in the way financing is done, he concluded.
Mergers and acquisitions, a fertile business in a consolidating logistics landscape, may also be reshaped. The large deals that rely heavily on debt financing have slowed, though small to mid-market transactions are still getting done, says Benjamin Gordon, managing director of BG Strategic Advisors, a supply chain mergers and acquisitions firm in Palm Beach, Fla.
Robert G. Erda, vice president of Ewing Bemiss & Co., a Richmond,Va.-based investment banking firm with a growing supply chain practice, says that because buyers will need to invest more of their own capital, they will demand more attractive pricing for acquisitions. This, in turn, will drive down valuations of companies that are on the block, especially those in the lower- to middle-tier range, he adds.
Blau says developers have been well served by taking a conservative approach to management, even during the market's up cycles. Because few regions experienced oversupply entering the downturn, most property markets are in balance, he observes. "There is not a great deal of excess inventory to start with," he says, noting that although vacancy rates are beginning to creep upward, supply is actually tightening in areas close to major urban centers.
In general, though, users of industrial space are waiting things out. "They're just going to sit still," Blau says. "If they had plans to expand, they'll wait." They may not have to wait very long: Erda expects debt financing to loosen up by the end of 2009's first quarter.
In early October, the chairman and CEO of ProLogis, which calls itself the world's largest developer of distribution facilities, told the Council of Supply Chain Management Professionals' annual meeting that retained occupancy rates remained stable across its customer base. "We work with a large cross section of global business ... and they are not moving," said Jeffrey Schwartz (who has since resigned from his post).
But conditions in the financial markets have been changing almost daily, so it was no surprise when ProLogis changed its assessment three weeks later and said that customers are deferring decisions on projects while they assess the impact of current market conditions on their businesses.
Industrial developers aren't the only ones feeling the pinch. The credit crunch is wreaking havoc on truckers' balance sheets as well. Trucking is mired in a three-year recession that many consider the worst since the severe downturn of 1981-82. With freight volumes down, indebted carriers are forced to price their capacity at marginal rates just to generate enough business to service their debt, according to Charles Clowdis, managing director-North American markets for the economic research firm IHS Global Insight. These actions, he says, trigger nasty rate wars that put the carriers on an even weaker financial footing. The vicious cycle has translated into truck rates that are about the same as they were two years ago, Clowdis observes.
Diesel fuel represents another liquidity problem, especially for the many low- to middle-tier truckers that must rely on lines of credit to pay their weekly fuel bills. Denied access to credit, truckers often burn through cash to meet their expenses while waiting 30 days or longer to get paid.
Motor carriers shouldn't hold their breath waiting for shippers to mend their slow-paying ways, especially in a rough economy. Clowdis, who spent more than 30 years in the trucking industry, says that even in good times, the freight bill is often the last one that companies pay. In bad times, that invoice will be pushed even farther down the pile. "Shippers think, 'What's the trucker going to do? Take away our freight?'" he says.