Cash-Starved Companies Scrap Dividends, Tap Credit (Update1)

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

The paralysis in credit markets is changing how U.S. 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.”

Ford Motor Co., the second-largest U.S. automaker, said it repaid $1.5 billion in debt that was due today, without giving details. Analysts said yesterday they expected Ford to make the payment in cash and not tap an $11.5 billion revolving credit line. Slumping auto sales and surging borrowing costs may boost U.S. new-vehicle dealership closures as much as 40 percent this year, the National Automobile Dealers Association said yesterday.

Deal Scrapped

Circuit City Stores Inc. and memory-chipmaker Spansion Inc. face higher interest expenses and slowing sales, analysts said. In the last week, Angiotech Pharmaceuticals Inc. scrapped a financing deal and newspaper publisher McClatchy Co. said it renegotiated credit lines.

Banks more than doubled the interest rate they charge each other for borrowing dollars overnight, known as the London interbank offered rate, to a record 6.88 percent yesterday, the British Bankers’ Association said. Adding to the financial stress was the U.S. House of Representatives’ rejection of a $700 billion bank-rescue plan Sept. 29 and the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15.

“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,” Michael Vogelzang, who oversees $2 billion as chief investment officer at Boston Advisors LLC, said in an interview yesterday. “Businesses are going to have to adapt.”

Carmike Cinemas halted its dividend payment and spent $10 million to pay bank debt, the Columbus, Georgia-based company said in a statement yesterday. Over the past four quarters, Carmike said it made $9 million in dividend payments. It has $285 million in bank debt, down from $302 million on Dec. 31.

Credit Agreement

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. Chief Financial Officer David Hauser said Duke 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.

RC2, the maker of Learning Curve products, sank the most in more than a year in Nasdaq trading yesterday after canceling its acquisition of Publications International Ltd.’s children’s publishing unit, citing difficulty obtaining financing. Citation Corp., a closely held auto-parts maker, said it postponed an acquisition planned for earlier this year due to the tightening credit markets.

“People are concerned with pending acquisitions especially if they are going to be financed via the debt markets or via bank-syndicated credit lines,” Timothy Conder, a St. Louis- based analyst with Wachovia Securities Inc., said in an interview yesterday.

`Unraveled a Week Later’

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

Vancouver-based Angiotech said last week that it wouldn’t be able to meet the terms of a financing deal with Ares Management LLC 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, California-based McClatchy, the publisher of the Miami Herald, announced Sept. 26 it 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.

Circuit City

Circuit City, the second-largest U.S. consumer-electronics company, hired turnaround firm FTI Consulting Inc. as an adviser, according to two people familiar with the appointment. 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.

Circuit City said in a statement Sept. 29 that it had suspended plans for store openings for fiscal 2010, beyond commitments already made, and may close unprofitable locations. The chain has more than 1,480 stores.

“The risks of bankruptcy are very real,” for Circuit City, David Schick, a Baltimore-based analyst with Stifel Nicolaus & Co., wrote in a Sept. 29 research note. “Vendors will have to decide how they plan to do business at Circuit City.” He recommends investors hold the shares.

Circuit City has a secure line of credit through Bank of America Corp. that is backed by assets including inventory, spokesman Bill Cimino said in an interview yesterday.

Suppliers `Sticking With Us’

“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.”

Spansion, the memory-chipmaker that hasn’t reported a profit since it was spun off from Advanced Micro Devices Inc. in 2005, may need to raise capital to stay in business, according to Cowen & Co. LLC analyst Daniel Berenbaum.

Spansion’s interest-coverage ratio, or earnings divided by interest expense, was negative 2.44 at the end of the second quarter. The lower the ratio, the less the company may have available to make interest payments.

Spansion had $240 million cash at the end of the second quarter, down 28 percent from three months earlier. It has $2.4 billion in liabilities, according to Bloomberg data. Spokeswoman Holly Burkhart declined to comment.

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