With the unprecedented upheaval in financial markets causing a near-lockdown in global credit markets, Deal Watch Blog called Chris Molen, a partner with Paul, Hastings, Janofsky & Walker in Atlanta, to discuss how the chaos on Wall Street is affecting corporate borrowers. 
Molen advises clients on financing mergers and acquisitions, asset-based financing, cash flow lending, structured finance and restructuring senior debt financings. Molen’s clients have included Bank of America, Toronto-Dominion Bank, SunTrust Banks and Wells Fargo.
The conversation was edited for brevity and clarity.
Various news reports have said that the global credit markets have virtually locked down. Can you comment on what you’re seeing in the market—who can find financing and what lenders are providing credit right now?
The AAA investment-grade type companies can still find financing. I’m talking about long-term credit facilities of one year to five years, term loans of one year to seven years, your traditional corporate loans. Probably there are solid [privately held] companies with a long track record and who have a relationship with their lender; they may be able to find some financing.
What the big banks’ philosophy is right now is that the deal has got to be really solid from a credit perspective. A deal has also got to have the prospect for other fee opportunities—providing advice on future bond issues, or cash management, some other kind of fee income. A bank wants a customer whose credit is beyond reproach and for whom they might be able to pick up other fee-earning opportunities.
A couple of years ago, even five years ago, there was plenty of money chasing deals. Lenders—banks, hedge funds, others—were quite happy to simply make loans and not worry about other fee income. That’s not the case now.
What type of banks and what size banks are not extending credit right now?
Banks who are watching their capital positions and who are under scrutiny from regulators regarding their own viability are really protective of their capital. Capital is so precious that the lenders don’t want to put it out for a mere loan unless it’s airtight, or if they’ve got the prospect for future fee opportunities.
The other thing that’s going on right now, the whole Lehman Brothers problem has lenders scurrying around to determine to what extent Lehman is involved in credit facilities they’re involved in and whether Lehman is going to be able to meet its obligations. If Lehman isn’t going to be able to meet its obligations, that could affect a borrower’s ability to make acquisitions, or they’ll have to limit their capital expenditures. These other lenders who are participating with Lehman, they’re not taking on Lehman’s credit risk. It’s more of an indirect issue, what’s the impact on the borrower. They’re not going to have to stand good for Lehman.
Are there any specific segments of the economy that are in trouble because they’re going to have particular difficulty in getting access to credit?
The industries that are certainly on watch lists are the big-box retailers and restaurant chains. I’m talking about restaurants in mid-priced customer category, not the low-priced or the high-end, luxury restaurant chains. The mid-priced restaurant chains, their problems really started with the rise in oil prices and the unwillingness of people to frequent those restaurants because they weren’t willing to make the drive to get there. These restaurants’ lack of revenue has affected their creditworthiness.
Residential real estate development has been considerably low for some time now. Is commercial real estate development about to start to slow significantly because of a lack of access to credit?
Absolutely. You’re already seeing a lot of projects slowing down, locally, nationally and internationally. I think we’re going to see a slowdown in the construction of new office buildings.
If domestic lenders are reluctant to provide credit, are non-U.S. lenders going to fill the void?
Certainly sovereign wealth funds [investment funds controlled by foreign governments] will increasingly be putting money into the U.S. But there is a limit to what they can do. They have only certain targeted investments they can make. Six months ago, there were a lot of foreign lenders who could take advantage of the situation in the U.S. But what’s going on right now, it has rippled through Europe, Asia, Russia; it’s affecting institutions and financial central banks around the world. I don’t think the answer in the very short run is a big increase in foreign investment. We’ve just got to ride it out. This downturn is as ugly as any I can remember, but they tend to run their course.
Why is private equity predominantly sitting on the sidelines during the turmoil? Private equity has got billions of dollars in capital waiting to be invested.
Private equity is spending capital to deal with problems in their own portfolio companies. Also, the way they make money is by leveraging their equity investments. If they can’t borrow against that equity infusion by a multiple of four or five times, they don’t make the returns their investors are used to.