Interest rates could affect capital spending

by Dan Malovany
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Most baking companies finance their investments through cash or a combination of cash and lending from banks or even their suppliers, according to Baking & Snack’s annual Capital Spending survey. However, financing is not a sure thing, especially in the long run.

Bakers may want to consult with their bankers if they are planning to make major investments in their operations in the near future. And they might do a bit of Federal Reserve watching as well.

It seems both cautious banks and bakers are looking for a quick return on investment.

“As you talk to lenders, they’re confident that rates will stay down in the short-term, but they get very uncomfortable with two years out,” said John Linehan, executive vice-president of King’s Hawaiian Bakery West. “They think interest rates will go up sharply then.”

Mike Timani, president and chief executive officer of Fancy Pokket, added that banks remain overly cautious when it comes to lending.

“I feel bad about how banks look at growth and investment opportunities to invest back in their businesses,” he said. “Yes, the banks made a lot of mistakes before, and now they’re overkilling it, and businesses are paying for that. What happens is it contributes to owners and investors who want to grow and expand their buildings to be more cautious and careful because the financing is not there. I would expect this to continue for the next two to three years. Banks won't be comfortable until they’re well beyond what’s happened in the past few years.”

Mr. Linehan wondered what liquidity might be like five years from now after easy money tapers off and interest rates rise.

“Capital spending will pull back in five years as a result of sharply increased interest rates,” he said. “A lot of companies will be able to afford to finance five years out but may not do it at that point.”
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