State feels pinch of credit crunch
Economy Some companies slow expansion plans

BY DON MECOY

Published: October 5, 2008

The global credit crunch is being felt in Oklahoma, and the impact could spread through the state’s economy if matters continue to deteriorate, local experts say.

Large Oklahoma companies that need short-term funding for operations find loans are harder to obtain, said Regional Economist Chad Wilkerson of the Oklahoma City Federal Reserve branch.

If those companies are forced to scale back because of credit problems, the impact will spread to smaller firms and the broader economy.

"If credit doesn’t begin flowing, the usual wheels of the economy can’t really turn, and so firms have to cut back, and that’s when it can start to affect the people at those firms and firms that are tied in with them,” Wilkerson said.

Chesapeake Energy Corp. recently cut its planned natural gas production due to lower commodity prices, but Chairman Aubrey McClendon told analysts that the company also has positioned itself to deal with the tight credit market.

"The credit crisis or crunch or whatever you want to call it, certainly will not to be favorable to companies that have to borrow a bunch of money to conduct their drilling programs,” McClendon said during a Sept. 23 conference call. "We have been preparing ourselves ... so that we can get to a point where we could still pursue all of our growth plans but at the same time also actually generate free cash flow from all of our activities.”

A recent poll by the Association of Financial Professionals of its members found that most respondents said their companies already had taken action due to tightening credit markets. Large companies, the survey found, were moving short-term investments to bank deposits or U.S. Treasuries, cutting back on capital spending and hiring.

The drying up of credit markets has essentially shut down the state and municipal bond markets, which could force Oklahoma to delay issuing $425 million in bonds for transportation and endowed chairs despite a recent hike in the state’s credit rating, state Treasurer Scott Meacham said.

"What we can’t sell in Oklahoma, there’s really no market for outside of Oklahoma right now because of the liquidity crunch,” Meacham said. "There’s just not any deals going on.”

Congressional approval of a $700 billion rescue package should inject some much-needed money into the system, Meacham said, but recovery likely will take months.

"We’ve never really seen a shock like this on wholesale side of our financial markets, even in the Great Depression, the wholesale side didn’t take a shock like it has right now,” he said. "It’s going to take a while for that money to come back.”

Oklahoma’s economic strength, boosted by robust energy and agricultural sectors and continued growth in housing values, helps insulate the state, said Brad Krieger, regional executive vice president for Arvest Bank.

"It may be a little bit trickier, but if it’s good solid underwriting, and the liquidity is there in the system, you can get those things done,” Krieger said.

"Good, solid business is going to get taken care of.”

Meacham said Oklahoma won’t be immune to the fallout from a lingering credit crisis.

The increasing conservatism of lenders will raise the costs of borrowing, and the corresponding decrease in companies’ profits will force cuts that will spread to the larger economy, he said.

Wilkerson said markets won’t completely recover until the housing crisis that sparked the broader problems runs its course.

"The short-term issues are these liquidity issues and (institutions’) unwillingness to lend to each other,” Wilkerson said.

"The fundamental issue is declining home prices. That’s what started all this and that has to come to end before this can truly return to normal.”

This region, in addition to its economic strength, can fall back on its experience in dealing with hard times, Wilkerson said.

"Oklahoma and our part of the country suffered in the 1980s and were made stronger for it,” he said. "We’ll come out of this, too, but we just have to fix some of these short-term credit market functionings to get us through this period.”

Keith Geary, chief executive officer of Capital West Securities, said small Oklahoma businesses aren’t getting hit as hard in the credit crunch.

"Maybe it’s not so bad to be the little community business and you’ve worked with your community banker,” Geary said. "He’s not going to pull your credit.”

"The credit markets are goofy.”

Keith Geary
CEO of Capital West Securities in Oklahoma City

Comments