Central Europe firms cut investment as credit dries

By Patryk Wasilewski

WARSAW, Nov 27 (Reuters) - Central Europe's leading companies will be forced to cut their investments to a bare minimum next year because of tighter credit conditions in the wake of the global financial crisis.

Until recently, oil and energy companies such as PKN Orlen PKNA.WA, PGNiG PGNI.WA, Lotos LTOS.WA or Enea ENEAa.WA had investment plans worth billions of dollars as they sought to expand in the booming economies in the region.

Financing was relatively easy until quite recently because the local banking sector remained overliquid.

But things have turned round abruptly. In October an IMF-led bailout of debt-laden Hungary sent a shockwave through the region, pushing down currencies and prompting parent banks to slash credit lines to their subsidiaries in the region.

"Investments are heading for a slowdown. Both small and big companies are revising their plans. The only plans that are going forward are those the companies cannot afford to postpone," said Malgorzata Krzysztoszek, an economist at business lobby group Lewiatan.

Poland's oil group PKN Orlen PKNA.WA, the region's largest refiner by capacity, has already cut investment plans to 2.5 billion zlotys ($856 million) annually from 3.5 billion planned earlier and others are very likely to follow.

"Certainly 2009 will be very difficult and the economic slowdown has to affect the sector. That is why we are doing everything to keep debt levels under control and to put certain investments on the waiting list," PKN chief executive Jacek Krawiec told Reuters.

The same is true for other major companies in the region. Hungary's leading refiner MOL MOLB.BU said earlier this week it will cut next year's investment spending by 35 percent. Drug maker Gedeon Richter GDRB.BU has similar plans.

CASH IS KING

While slowing exports and domestic demand will hit corporate revenues and ability to generate cash, analysts say, the unprecedented credit crunch will make it extremely hard for companies to borrow or roll over their existing debt.

BNP Paribas economist Michal Dybula said lending may not only slow next year but contract in nominal terms. This will hit the companies' ability to finance both their growth as well as regular day-to-day operations.

Lewiatan's Krzysztoszek said he was certain it would actually be the big companies with extensive financial needs that feel more of the pain and not the smaller firms.

"The big companies are going to have the biggest problems. As the loan gets bigger the risk rises, so the banks will be more reluctant to offer such deals and will demand higher prices and collateral," Krzysztoszek said.

With the equity market slump and interbank rates at historic highs, other sources of cash such as the stock market or fixed income market are off the table.

"Recently there was only one bond issue by a company with a rating below 'A' and the spread (over the interbank rate) was agreed at 590 basis points," said PKN's chief financial officer Slawomir Jedrzejczyk. (Editing by Chris Wickham)