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The Employee Ownership Update

Corey Rosen

November 3, 2008

(Corey Rosen)

New NCEO Survey Shows Limited Impact of Credit Crunch on ESOP Company Borrowing Capacity

A new NCEO survey of 222 diverse ESOP companies shows that 75% have experienced no change in access to long-term credit and 79% have had no change in access to short-term credit. Only 1% said they could not get credit, and only about 11% said that credit of either variety was much harder to find. In comments, many of the respondents indicated they were not having problems because they had no current need for credit, either short- or long-term. Some of those who do need credit report that the cost has gone up, generally by one or two percentage points. We found no significant differences between S corporation and C corporation ESOPs, or 100% ESOPs versus non-100% ESOPs.

ESOP companies have generally been more successful than comparable non-ESOP companies and have been able to use that to build a capital advantage. That no doubt makes the credit issue less painful for them than it is for other companies. But we also found that even companies with ESOP debt had very similar response patterns to those without it. Surprisingly, debt coverage ratios (measured as the ratio between debt and EBITDA--earnings before interest, taxes, depreciation, and amortization) had no statistically significant impact on the availability of credit: companies with high levels of debt relative to their earnings were only slightly more likely to say that their access to credit had decreased.

Forty percent said they expected to grow, but at rates less than they had previously budgeted, while another 18% said the credit crunch would not affect their projections. Just 2% said they planned to do better, while 13% expect zero growth, 23% slower growth, and 4% said they were concerned about their viability. Few companies plan to change how their plans are operated in response to the crisis, but 38% have delayed or may delay raises, and 32% have delayed or may delay capital investments. Construction companies were somewhat more pessimistic, with a third expecting to shrink and 6% concerned about viability, but even this group showed surprising overall strength.

A more detailed analysis of the results is included in a new issue brief from the NCEO titled Dealing with the Downturn: Issues and Strategies for ESOP Companies. The issue brief contains the survey results and articles by experts on the state of ESOP financing, how to deal with more difficult credit markets, valuation concerns, and ideas for communication with employees. It is available to NCEO members for $15 and nonmembers for $25, plus shipping.

Beyster Institute and Rutgers Sponsors Research Fellowships on Employee Ownership

The Beyster Institute at the Rady School of Management and Rutgers University are sponsoring five research fellowships in employee ownership. They include a post-doctoral research fellowship, three fellowships to support graduate-school-level research fellowships, and one undergraduate fellowship. Two of the graduate fellowships require a stay at Rutgers. Grants range from $1,000 to $25,000.

For details on the program, go here and call up the PDF file on the Rutgers fellowships.

French Government Renews Push for Broader Employee Ownership

Early in his administration, French President Nicolas Sarkozy proposed new legislation to encourage more broad-based employee ownership, but his political problems put that on hold. Now the worldwide financial crisis has given the concept new life. In a September 25 speech, Sarkozy called on French business leaders to voluntarily adopt new guidelines on executive pay, one of which would be to grant executive stock options only if the company also has an employee profit sharing or broad-based ownership plan. Sarkozy said that if industry did not voluntarily adopt these standards, the government would introduce measures to impose them. Companies have until the end of the year to adhere to the proposed guidelines. It is not yet clear whether the guidelines and, if needed, subsequent legislation, would apply to all companies or only companies of a certain size of or set of characteristics (such as publicly traded companies).

IRS Publishes New Maximum Benefit and Contribution Rules for 2009

The IRS has published its annual update of plan contribution and benefit limitations for 2009. Key changes for ESOP companies include:

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