2nd Quarter 2013 Hotline
Market Watch Southern Industrial Development
by Joe A. Hollingsworth, Jr.
For the last 25 years, we have been a strong proponent of taking “risks” on interest rates on our real estate loans by tying them to floating LIBOR (the London InterBank Offered Rate). While this decision has often been controversial, we have been very positively affected by insisting our rates float with LIBOR versus long-term fixed rates. In the past, our view for being tied to LIBOR was based on: (1) the difficulty of long-term lenders (life insurance companies, etc) to “re-open” the loans for alterations, expansions, or sales of property; (2) the penalty of fixing long-term rates seemed to have too big of a premium putting some projects closer to debt coverage ratio problems and reducing profits; and (3) the penalties to get out of long-term fixed rate deals were often onerous. So, as a policy, we decided instead of paying a premium for the fixed rate, why not use the excess cash flow provided by the lower short-term interest rate to amortize the debt more quickly? Therefore, every year you decrease your exposure to the floating interest rate because of reduced principal. Now this equation has radically changed. For the first time in 25 years, our opinion is that there is increasing risk in holding debt floating with short-term LIBOR rates. A few of the reasons are as follows. According to the International Monetary Fund, gross US government debt is currently at 107% of GDP. A fiscal crunch will force the central bank to pursue inflationary policies, a situation that’s called fiscal dominance. Running higher than targeted inflation is one politically feasible method for “reducing” the outstanding US public debt. When there is little will to harm domestic voters, politicians might turn to this seeminly harmless way to solve the problem. With the above said, there is a very possible scenario for major medium-term inflation. Long-term fixed rate lenders have become more aggressive and also more flexible by reducing restrictions and pre-payment penalties to place money in this slow-growth economy. Changing now to a higher fixed interest rate will immediately impact your bottom line by paying a premium over floating LIBOR. However, the premium could be just viewed as insurance against the potential possibility of catastrophic losses from runaway inflation.
"I fully recommend working with The Hollingsworth Companies if cost or time driven schedules play a part in your company's opportunity because they do deliver within budget and on time with no change orders or surprises." -- David B. Sutherland, CMS Companies
"Southern states are home to 50 million more residents than the Northeast. In corporate growth, only the South has shown a positive net migration in the early 21st Century." -- Plano Star Courier
"We invited The Hollingsworth Companies to our Atlanta Offices. Within two weeks all negotiations were completed and the lease was executed. From beginning to end, it only took 45 days to complete our requested up fits." -- David B. Sutherland, CMS Companies
"The bottom line is that we could not be more pleased with our Hollingsworth Companies experience." -- Karl F. Hielscher, President and CEO, Metl Span
“From greenfield startup to becoming a national industry leader 10 years later, Hollingsworth continues to play an invaluable role in Service Center Metals growth and success.” -- Scott Kelley, President and CEO, Service Center Metals
"Hollingsworth entered an agreement to ensure quick delivery of the pre-approved standard building sizes . We are committed to deliver the structural steel, ready for erection, in just 6 weeks from receipt of a final building order." -- Jeff Carmean, General Manager, Nucor Building Systems
"Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction." -- Scott Kelley, President and CEO, Service Center Metals
