Bailout or Bust?

Okay, so you heard the entire debate about the economic bailout plan (officially known as the Emergency Economic Stabilization Act), and are aware of all the "deals" made beforehand with AIG and some of the investment banks. You also heard that this "fix" was required to shore up the banks and get the credit markets moving again. Hearing that, you're probably thinking all will be right with the world now, and you can ignore last month's column about tight credit markets.

Not gonna happen...

After President Bush signed the bill and I had a chance to listen to various "experts," I went back to Ken Hedlund and Robert Frentzel, contributors to last month's column, for their insight. Unfortunately, no matter who you talk to, it will take time to get the changes in the bill through the system; in the meantime, credit is going to be tougher to get than it was before things hit the fan. So, pretty much what we suggested last month is still on the table. Things may be a little better, but not to the point where credit will be easy to get.

Uncertainty in real estate lingers on

Banks are still nervous. They are still hesitant to loan funds to each other. The Federal transactions will take some time to complete, which will push out the recovery time. And like it or not, real estate - and thus construction - will not be high on any bank's list when they sit down to discuss what markets to hit going forward.

Banks will also be more cautious with their lending policies. They will be pushing a de-leveraging model, which will require more collateral and less debt to avoid over-extending themselves based on conservative lending standards.

A recent survey of real estate executives suggests the majority are writing off 2009, with 92% of respondents holding a bearish outlook for the next 12 months. Of this group, 62% believe it will be 2010 before the real estate market stabilizes, with another 22% thinking it will be 2011. The multi-family housing market holds some 12-month potential, with the single-family market pushed out to 2010 and 2011.

And who knows what will happen with the housing market now that some relief is in sight. Housing may stabilize, but is not scheduled to hit former new start rates for many years to come.

Tough decisions still ahead

No matter how you look at it there is a gap forming in available work that may not turn around until 2010 or 2011. As the leader of your construction company, you have to make decisions how to:

  • weather the storm;
  • get new work;
  • finance new work;
  • control increasing costs;
  • and complete the work you've bid on so that you make a profit and generate enough cash flow to cover both variable and fixed costs.

Not an easy task.

The end result is that nothing really has changed. Your ability to get work and make a dollar is dependent on where you work and what you do. Some contractors will act as if nothing is going on. But most are feeling the pain and are doing what they can to survive.

That being the case, it's time to dig out last month's column to read one more time, because the credit squeeze is still on and will be for some time to come.

Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or gbartecki@comcast.net.

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