Crunch/mike1st/mark2nd

By JASON BOOTH

Staff Reporter

Spooked by Wall Street losses and fears that the U.S. economy is slowing, banks throughout Los Angeles are tightening up their lending criteria a striking turnabout from the relatively fast-and-loose policies of just six months ago.

As a result, many local companies may find their access to capital cut off, or severely constricted. Those companies still able to qualify for loans could see higher interest rates.

“The blue-light special is over. Every industry sector, every credit facility is being priced higher,” said Tara Balfour, senior vice president of structured banking at BankAmerica Corp. “Banks are recognizing that you have to look at how the economy is changing and factor that into how you underwrite deals.”

Under more positive conditions, the fact that banks are becoming more cautious would be of little concern to most borrowers. But with Wall Street in convulsions and the market for initial public offerings effectively shut down, local public companies already have lost a key source of funding. The high-yield bond market, once a key source of financing for higher-risk companies, is also in a deep freeze.

A credit crunch, even on a limited scale, could have a profound effect on the economy, which is why speculation persists that the Federal Reserve will lower interest rates again in the coming weeks.

In theory, there should be no shortage of available capital. Over the last few years, hundreds of billions of dollars in investment capital have flooded the United States as investors pull out of collapsing markets from Tokyo to Moscow.

As a result, most banks operating in Los Angeles have seen their deposits swell and their balance sheets improve.

“The credit crunch is not a lack of available capital,” said Bob Schack, chairman of U.S. Business Bank in downtown L.A. “There is a tremendous amount of money out there looking for good deals. But over the last six years, the credit standards have reduced to the point where banks are starting to worry. We will see credit standards tighten up, and that’s a good thing.”

Until very recently, lending activity has been brisk among most L.A. institutions.

Imperial Bancorp a big lender in the industrial, high-tech and entertainment sectors saw its loan portfolio rise 15 percent in the first six months of the year, exceeding $3 billion as of June 30, according to the California Department of Financial Institutions. Mellon 1st Business Bank increased its loan portfolio by around 11 percent over that period.

“It has been an intensely competitive environment,” said Joe Morford, an analyst at Van Kasper & Co. in San Francisco. “Mostly the competition has been in pricing. But some banks have been a little slack in their underwriting standards.”

A Federal Deposit Insurance Corp. survey released in May showed that of the 387 banks surveyed, 31 percent said they frequently funded speculative construction projects, up from 27 percent in October 1997. The report also showed that an increasing number of banks were making business loans to borrowers who lacked documented financial strength.

That survey prompted FDIC Chairman Andrew Hove to issue a statement calling on banks to use increased vigilance against excessively risky loans. “I think banks will be more cautious because they feel that the Fed is looking over their shoulders,” Morford said.

Hollywood was one of the first local industries to feel the heat. Weakness in key overseas markets for U.S. films such as Korea, Thailand and Japan has prompted local banks such as City National Bank and Imperial Bancorp to become more conservative in their lending to film producers. As a result, production of independent films is down as much as 20 percent so far this year, compared with the like period last year, industry sources said.

Commercial real estate is another industry being constrained by a tightening of lending requirements and an increase in pricing. In recent weeks, dozens of local real estate deals have fallen through or have been renegotiated at higher interest rates because investors have become more risk-averse.

The fear is that, while the economy today remains bullish, property values will start to decrease over the next few years. As a result, investors are demanding higher interest rates to compensate for the increase in perceived risk.

“Buyers are not willing to pay as much due to the perceived pullback of the publicly traded investors,” said John Strockis, a managing director at CB Richard Ellis. “It has been a white-hot market for the last 18 months, but that is now over.”

Paul Watson, vice chairman for consumer and corporate lending at Wells Fargo & Co. in Los Angeles, pointed to agriculture as another sector that is particularly sensitive to economic conditions overseas.

Many local fruit exports, such as oranges and melons, are considered luxury items in countries like Korea and Japan. As such, their sales were among the first to suffer when the Asian financial crisis struck.

Grain exports such as corn, which is used as animal feed, have been hurt because consumption of beef in those countries has declined. As a result, Wells Fargo, which is among the largest lenders to the California agricultural industry, will be increasingly cautious when lending to growers dependent on Asian sales, Watson said.

L.A.’s high-tech community also could suffer, bankers say, as its exposure to the Asian economy takes its toll. The San Francisco area has seen a slowdown in employment growth as weaker demand from Asian consumers shrinks the profits of computer chip and software makers.

“We won’t go out and do the cash-flow-dependent deals that we might have done in more liquid times,” said Terry Bess, who runs the Los Angeles operations of Silicon Valley Bank.

Bankers and economists stressed that Los Angeles, which has only recently fully emerged from its last recession, will likely be impacted less by a tightening of credit than many other parts of the country.

They point out that the current stiffening of lending standards can be categorized as a flight to quality. Just as investors on Wall Street are flocking to blue chips, lenders are looking for loan customers that have the strongest balance sheets and track records.

And with its newly resurgent and increasingly diversified economy, Los Angeles may be the safest region in the country in which to invest. Furthermore, smaller local financial institutions may even benefit by picking up new loan customers if the major money-center banks become more restrictive in their lending practices.

“I’m very excited,” said Dominic Ng, president of EastWest Bank in San Marino. “For the last six months we have had a difficult time competing in the mortgage business against the giants like Lehman Brothers and Credit Suisse First Boston. But at this time, even though we may not be able to offer as good terms, the borrower is more likely to accept our offer because the banks are the only ones offering.”