By Christopher Moraff
There’s been a lot of talk lately about when the economy will enter full recovery mode and what the so-called “new normal” will look like. A decisive indicator of this transition, and one that is of special interest to those of us in commercial finance, is the state of the lending environment.On a macro level, signs point to a sustained, albeit slow, rebound in the lending markets. The most recent Beige Book report — released by the Federal Reserve in June — found economic conditions strengthened in all of the central bank’s regions in April and May for the first time in more than two years. Business spending increased moderately as loan demand began to expand.
But the return to normalcy is not coming in leaps and bounds; more like baby steps. And the morsels of good news are framed by a lingering perception of a new economic environment characterized by both lackluster loan demand and tight credit availability. Back in April, when five asset-based lenders gathered to discuss the state of credit markets, they pointed out that perception does not always translate into reality.
The panel discussion, titled Lending & Credit Availability: Perception vs. Reality, was jointly hosted by ABF Journal, the New York Institute of Credit and the Turnaround Management Association’s Philadelphia Chapter, and included Christopher Stavrakos of Wells Fargo Capital Finance; Amy Lindsay of Sovereign Bank; Randall Siegele of JPMorgan Chase; and John DePledge of TD Bank Asset Based Lending. Paul Shur, of the law firm Sills, Cummis & Gross, served as the moderator.
All of the participants agreed that 2010 is witnessing a return to levels of credit availability not seen since before the recession.
“I think that once 2009 was on the books there has been a change from a number of organizations. We were active in the last half of 2009, but we’re even more active now,” said DePledge. “I see the same thing in our competitors. Wounds have been healed and people are out looking for growth opportunities. There is a lot of momentum to generate as much business as possible.”
Yet they agreed there is a feeling that continues to permeate the industry, buoyed by gloom-and-doom media reports, that credit remains unavailable for most U.S. businesses.
Stavrakos chalks that up to the belief that banks aren’t lending, a misconception that he said he sees at the highest levels of the business community. “There is so much confusion out there — the perception in the markets is that the banks are really holding back on lending,” he said. “There could be some of that because some banks are still in trouble, but I know of others that are very active.”
Instead, Stavrakos insists that credit is abundantly availability for the “right borrower.” “There is demand for working capital facilities, if the customer or prospect is the right customer in the right box.”
He means that lenders are taking a closer look at credits than they did in the past, an undertaking made simpler by the market dynamics of the past 36 months. “Competitiveness has taken the weak players out of the market, leaving the stronger players and the stronger equity groups to take advantage of acquisition and expansion, and on those deals there are four, five or six banks bidding and, in some cases, the pricing is coming back to 2006, 2007 levels,” Stavrakos said. “The money is there and there credit philosophy is there to book good deals.”
Lindsay makes a similar point and said at Sovereign she is seeing competitive structures coming back. “In the larger transactions, the syndications, you are seeing deals being oversubscribed again; you are seeing that drive to be the first one back with the answer,” she said. “You’re not seeing as much push back on the pricing as you did last year.”
She says that doesn’t mean that pricing is “falling off the table again,” but “it’s coming out at more favorable economics to the lenders upfront as opposed to having to go through various stages of settling in.”
Lindsay adds that both lenders and borrowers are settling into a “new normal,” which, by virtue of necessity, is going to feel like a tighter credit environment. But, she insists, it’s a mistake to confuse lender sensibility with lender pullback. “I think that banks are trying not to do stupid things and create their own problems in working those out,” Lindsay said. “I think on some of the small business transactions, some of those loans shouldn’t be made anyway. So I think that’s what’s going into some of those numbers in terms of the credit crunch. There are still undesirable borrowers out there. They were probably undesirable three years ago when we made the loan, now we’re not making those loans.”
Siegele, of JPMorgan Chase, says that credit availability is not the only issue; loan usage, he said, is “way down” He added, “There’s been a lot of talk about the unavailability of credit but if you look at what’s occurred I know from our standpoint we are seeing historically low usage of our facilities out there in the market.”
Much of the activity he sees is a function of refinancing existing debt, not new money coming out for new uses, he said.
If there is one thing that’s indisputable, it’s that 2010 is on track to be a year of recovery; but how much and how soon no one can say. At the end of the day, lenders and borrowers alike need to adjust to a new “box,” to use Stavrakos’ term. And for better or worse, being squeezed into a smaller space can be uncomfortable.
In the meantime, Lindsay said: “What borrowers have to do is face the reality that they are not going to get the deal they got three years ago.”
Christopher Moraff is an associate editor for ABF Journal.