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October 20, 2008

Wall Street to Main Street | How national shakeups affect the Maine economy

By Whit Richardson

The headlines are hard to avoid: Wall Street’s financial markets hit a tailspin over the past few weeks as some of its largest firms — including Lehman Brothers and Bear Stearns — began to buckle under the stress of the subprime meltdown. The volatile market — the Dow down 700 points one day, up 400 the next — and a $700 billion federal bailout package that at press time had not been passed are unprecedented. So how does what’s happening on Wall Street affect Maine’s business community?

• Disappearing financing

In late September, Red Shield Environmental, which filed for bankruptcy in June, decided to put itself up for auction rather than pursue financing to restart its Old Town pulp mill. “What changed was the state of the credit markets,” Robert Keach, Red Shield’s attorney, recently told Mainebiz. “It’s extremely hard to get commercial financing at the moment.”

Red Shield, which bought the former Georgia-Pacific mill in November 2006, had lined up a $13.6 million loan from Woodside Capital Partners in Burlington, Mass., to restart the mill, but the bankruptcy hearing to approve the loan was postponed three times. Keach said a participating lender in the agreement, who he would not name, then pulled out of the deal. In light of the credit market, the company’s management decided the best course would be to auction the company and its mill, which is valued at more than $48 million. The auction is scheduled to take place Oct. 22 with a starting bid of $11.5 million and the assumption of certain contracts, Keach said.

• Careful state investments

Past experience helped the Office of the State Treasurer avoid the fury in the markets. After almost losing a $20 million investment in Mainsail II, a fund run by U.K.-based Solent Capital Partners that held corporate bonds backed by subprime mortgages, State Treasurer David Lemoine, who oversees Maine’s cash pool of between $400 and $600 million, says his office changed its investment strategy so its portfolio didn’t rely so heavily on mortgage-backed securities. As a result, Lemoine says the state made $26 million, or a 4% return, last fiscal year, which ended in June. But the events on Wall Street do mean lower interest rates for Maine’s investments. This year, the state’s investments have earned 2.4%, or on average $1 million a month, he says. “We continue to be safe and productive and we hope the market recovers,” Lemoine says.

• Bond blocks

For many, the affect of the financial crisis on Maine became apparent when Wall Street traders told the Maine Municipal Bond Bank there was no market for its $50 million transportation bond that would have paid for 10 highway reconstruction projects. “In 34 years I have never had a trader say, ‘I can’t give you a sale price. There is no market,’” Robert Lenna, executive director of the state’s bond bank, told the Portland Press Herald. The bank’s board of directors voted to back away and wait to sell the bond when the market quiets down a bit.

The bank in early October will try to sell another bond package, this time $99 million in municipal bonds that will pay for 20 projects across the state. “I don’t think there’s any question the interest rates will be higher,” Lenna told Portland news station WCSH 6. “Even if Congress passes some sort of legislation to deal with the credit crisis.”

• Bruising uncertainty

Whatever happens on Wall Street, what matters is that people can’t predict the future and are getting jumpy, which by itself can have a tremendous impact on the business community. “Uncertainty often times has a stronger effect than many think,” says James McConnon, a professor in the University of Maine School of Economics.

Credit, which impacts businesses in several ways, from their own ability to access capital to consumers’ ability to spend money, is getting tighter, and that is worrying Maine’s small business community, McConnon says.

So far, credit hasn’t dried up and most businesses are doing fine, says Robert Strong, a professor of finance at the university’s Maine Business School. “The community banks we got will continue to support customers and life will go on,” he says.

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