Credit lockdown puts companies in crisis mode

Carmike Cinemas, the third-largest U.S. theater chain by screens, suspended its dividend, while Duke Energy, owner of utilities in five U.S. states, tapped $1 billion from a credit agreement and RC2, the maker of infant and preschool products, canceled an acquisition.

The paralysis in credit markets is changing how companies do business as banks pull back on loans or make them prohibitively expensive. Some companies are closing plants and stores, postponing takeovers and grabbing any available credit in a fight for survival.

"If businesses don't have access to capital, smaller companies in particular, they might get wiped out," said Alec Young, a New York-based equity strategist at Standard & Poor's. "It's impossible to quantify how expensive this crisis is going to be for corporate America. There's unlimited downside."

Slumping auto sales and surging borrowing costs may shut down as many as 600 new-vehicle dealerships this year, 40 percent more than last year, according to the National Automobile Dealers Association.

Circuit City Stores may struggle to stay in business, analysts said.

In the last week, Angiotech Pharmaceuticals scrapped a financing deal and newspaper publisher McClatchy renegotiated credit lines.

On Tuesday, banks raised the interest rate they charge each other for borrowing dollars overnight — the London interbank offered rate — by the most ever in a single day, more than doubling it to an all-time high of 6.88 percent, according to the British Bankers' Association.

As money-market rates rise, banks charge higher interest on loans to companies and consumers.

"It's almost inconceivable that there won't be an enormous slowdown in the U.S. markets and with that, increased joblessness, lower employment and higher bankruptcy rates, both personal and corporate," said Michael Vogelzang, who oversees $2 billion as chief investment officer at Boston Advisors.

"Businesses are going to have to adapt."

Carmike Cinemas halted its dividend payment and spent $10 million to pay bank debt.

Duke Chief Financial Officer David Hauser said the company is drawing from its credit agreement because it wasn't clear whether it would be able to secure more than $1 billion in new financing this year as planned.

Duke has $650 million in bonds coming due this year, $442 million scheduled to mature next year and $500 million in 2010, according to data compiled by Bloomberg.

The shares of RC2, the maker of Learning Curve products, sank the most in more than a year in Nasdaq trading after the company canceled its acquisition of Publications International's children's publishing unit, citing difficulty obtaining financing.

Citation, a closely held auto-parts maker, said Tuesday it postponed an acquisition planned for earlier this year due to the tightening credit markets.

"Things you thought you had done last week get unraveled a week later," said Citation Chief Executive Douglas Grimm. "The difficulty in the credit markets and your ability to negotiate with the banks is affecting everyone."

Vancouver, B.C.-based Angiotech said last week it wouldn't be able to meet the terms of a financing deal with Ares Management of Los Angeles and New York-based venture-capital firm Leaf Venture Partners, citing lowered revenue expectations and cash shortages.

The developer of drug-coated medical devices said it plans to cut jobs, close a U.S. plant and delay a new product.

Sacramento, Calif.-based McClatchy, the publisher of The Miami Herald, Tacoma News Tribune and with a 49.5 percent stake in The Seattle Times Co., announced Friday it had negotiated an amendment with banks on its $1.18 billion credit line, agreeing to higher interest rates and borrowing limits in exchange for more lenient terms on cash flow.

The interest rate on Circuit City's long-term debt is tied to Libor, which may increase the company's quarterly interest payment by at least $2 million, according to Bloomberg data.

"The risks of bankruptcy are very real," for the unprofitable consumer-electronics company, David Schick, a Baltimore analyst with Stifel Nicolaus, wrote in a Sept. 29 research note. "Vendors will have to decide how they plan to do business at Circuit City."

Circuit City spokesman Bill Cimino said the company has a secure line of credit through Bank of America that is backed by assets including inventory.

"We feel we have adequate liquidity to fuel our turnaround providing our vendors can support us," Cimino said. "Even though the capital markets are making things more difficult for them, our vendors are sticking with us."