We also reported "volatility is the only thing that seems to be predictable right now." Well, sure enough, the volatility has continued.
Three themes for this week:
1) Lending at largest banks has declined
2) Commercial and industrial lending is higher, but history predicts big falls in the coming months.
3) January's Commercial Paper gains are erased
1) Lending at largest banks has declined
The Wall Street Journal reported on Friday that lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.
According to WSJ analysis, ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008.
2) Commercial and industrial lending is higher, but history predicts big falls in the coming months.
Looking exclusively at the largest banks does not, however, give you an accurate picture of lending activity.
According to data from the Federal Reserve Bank of St. Louis, in December 2007, commercial and industrial loans were up 20% year-on-year. In December 2008 (one month ago), lending levels were up another 10%, at their highest level in years. One explanation could be a rush at the end of 2008 to refinance existing debt.
If you take a look at commercial and industrial lending rates in the last 50 years, history suggests there are big falls on the way. According to data from the Federal Reserve Bank of St. Louis, in previous recessions, commercial and industrial lending has declined up to 10% year-on-year within a year of the recession ending and hit the lending low several months after the recession was over.
Astute business owners are not waiting for tougher times ahead, but are sourcing replacement debt refinancing today.
The FED is doing the best they can with the TARP money, but it would be bucking a historical trend if lending rates increased this year. Take a look at the chart below from the Federal Reserve Bank of St. Louis:
The shaded areas indicate previous US recessions.You can see from this chart that in 2002, after the recession had officially ended, commercial and industrial loans declined around 8% from the previous year.
The biggest problem with replacing or sourcing new debt is inspiring confidence in the lender that they will see their loan repaid. Oftentimes, much more can be done by the Borrower to present clear and accurate data and projections, as well as promising real-time financial reporting to the lender.
In good times, lenders will take more risk where there is uncertainty. In tough times, lenders are more cautious and require more certainty. It is up to you, the Borrower, to give the lenders that certainty.
3) January's Commercial Paper gains are erased
As we reported two weeks ago, Commercial Paper was trading at the fastest pace since May 2008. Unfortunately, we may have spoken too soon.
As a reminder, commercial paper is an IOU from a large bank or corporation, which matures within 9 months. Some commercial paper is backed by assets and some is traded purely on the bank or company's reputation and credit-worthiness. As you would imagine, it is used for short-term debt obligations and trades at a discount to the face value of the paper.
It is a sign of confidence when commercial paper is being actively traded, but according to Federal Reserve data, volumes have now declined for the second week in a row and wiped out much of early January's gains.
I guess we'll just have to get used to this volatility - it doesn't seem to be stabilizing anytime soon.
The total commercial paper market is down over 20% in the last eighteen months to $1.69 trillion from the peak of $2.2 trillion during the summer of 2007.
Hopefully, we'll bring you better news in the coming weeks, but please take this away with you.
If the historical worst case happens as in previous recessions, we may see a 10% reduction in commercial and industrial lending. A 10% reduction still means that lending is at 90% of the levels that we see in the good times.
Just make sure you're not in that 10%. It's easier said than done, but with careful planning and accurate forecasting, you can even get troubled companies through new or replacement debt financing. You just have to be open, clear and communicate well with new lenders and present them with reliable and reasonable forecasts. You should also map out best case and worst case scenarios.
Lenders want to make loans - you just need to make them feel comfortable that they'll get their money back.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
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