After Lehman, U.S. firms adjust to new face of credit

By Walden Siew

NEW YORK (Reuters) - A year after the collapse of investment bank Lehman Brothers (LEHMQ.PK), frozen credit markets are piecing themselves together again but the face of borrowing is dramatically different.

Lehman's failure trapped money market and hedge fund managers in a web of bankruptcy proceedings, and left derivative deals in limbo along with corporate bondholders.

The fear of further bank failures froze short-term and interbank lending markets, choking credit and blocking the pipeline for the once-massive market in asset-backed securities, also used to supply lending.

The new borrowing environment means the cost of capital for corporations remains higher than in the boom years before the crisis hit, even as official U.S. interest rates have been slashed to near zero.

Tight credit limits companies' ability to spend on new business and weighs on future growth, at a time when U.S. unemployment has jumped to 26-year highs.

In a reflection of how lending has become riskier, Moody's Investors Service downgraded ratings on a record $3.5 trillion of U.S. corporate debt last year on raised concerns about the ability of companies to pay back what they borrow.

For investors, consumers and companies, ranging from conglomerate General Electric (GE.N), which employs 320,000 people worldwide, to Ball Corp, a packaging company with 14,000 workers, the credit landscape offers new challenges.

Corporate officers like Scott Morrison, treasurer of Broomfield, Colorado-based Ball (BLL.N), are having to spend more time securing bank commitment letters and building bank relationships, while banks must diversify their business to limit risk and settle for smaller profits.

A 10-year note issued by Ball Corp in August had 10 banks help with the underwriting, versus five or so in years past, Morrison said.

BORROWERS COMPETE WITH GOVERNMENT FOR FINANCE

Investors shunned corporate debt markets in the panic of late 2008 regardless of individual companies' creditworthiness. The flight to the safety of U.S. government Treasury bills drove yields down to zero or even lower on a few occasions.

As investors lent their money for free to the U.S. government for safekeeping, corporate America struggled to issue new debt or refinance existing bonds.

Yet since December, when investors demanded record high returns to risk buying corporate debt, investors have overcome some of their fears about riskier debt. Issuance has surged to a record volume and fueled a meteoric rally.

Investors in junk bonds also have benefited. Average returns for U.S. junk bonds soared to 40 percent, to lead the performance of major asset classes year to date.

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