I have to admit I was a little surprised by the lack of optimism when six asset-based lenders gathered this morning at the Langham Hotel in Boston for TMA’s annual “Asset-Based Lending Panel”.
I put this question to lenders from Wells Fargo, RBS Capital, Bank of America, Santander and TD Bank: “Total loan volume [for U.S. banks] dropped by 7.4% in 2009. Do you think 2010 will bring an expansion or a further decline in bank balance sheets?” Christopher Stavrakos, an Executive Vice President with Wells Fargo Capital Finance answered first. “We’re hoping to hold the line on our outstandings this year. Loan usage [the average amount drawn on existing loans] is down to around 50%, so short of economic expansion, the only way for us to lend more is to take market share.” Barry Kastner from TD Bank said “we’re up by about 1% over last year, but for the market overall, I don’t expect to see [loan volume] growth”.
Now, to be fair, several of today’s panelists were upper-middle management, not CEOs. These guys don’t want to be out in front making forward-looking statements that might be misconstrued in the press. So I asked the question differently: “Not speaking to your own bank’s balance sheet – but simply looking at the total U.S. loan volume for 2010 – do any of you expect expansion of even 1 percent this year?”. Nobody raised their hand. This is not great news for borrowers. This means that the expectation among major lenders is that a significant number of borrowers will continue to reduce their outstanding loan balance to compensate for (a) whatever new borrowers come into the market in 2010, and (b) the handful of market leaders who will actually grow their business and increase their borrowing this year.
Insights from the Asset-Based Lending Panel regarding the current availability of term loans:
- Chris Carmosino of RBS Business Capital noted that his group “had just 2 charge-offs [bad loans] in 2009 out of approximately 200”. He went on to point out that both of them, as well as most of the credits on their watch list, were term loans (rather than revolving lines of credit).
- Peter Schwab, CEO of Wells Fargo’s Asset-Based Lending Group said that they are no longer providing stand-alone term loans.
- Barry Kastner from TD Bank said that they “continue to provide term loans upwards of 25% of a total loan package” (suggesting that the bulk of the package would be in the form of an asset-based revolving credit line).
Term loans, both secured and unsecured, represented the lion’s share of credit bubble excesses. These loans were the primary source of long-term debt for thousands of middle-market borrowers who were extended credit largely based on their earnings during an economic expansion. Today, term loans for real estate and other fixed assets are available for small borrowers – in part due to IRBs and SBA-backed loan guarantees, but they have been hard to come by for acquisition financing and businesses seeking $10 million to $25 million in long term financing.
Turnarounds and DIP Financing:
- During the credit market boom, private equity firms and strategic buyers were able to find debt financing for all manner of turnaround situations and distressed company buy-outs. If the management team had good resumes and a powerpoint presentation, there would be someone willing to lend them money to acquire and/or turn around a distressed business.
- Likewise, debtor-in-possession (DIP) financing was readily available for businesses seeking to restructure under Chapter 11. As a result, there was a tremendous wave of bankruptcies in 2003, 2004, and 2005, and the lenders offering DIP financing were earning tremendous fees with low default rates.
- Today is a different story. Christopher Stavrakos with Wells Fargo Capital Finance said this morning that they now require at least “a 3- to 6-month period of improved performance” (suggesting the turnaround is already underway) before they would consider financing a business that had recent losses.
- Barry Kastner at TD Bank was somewhat more optimistic, in that he felt the market for refinancing of distressed businesses was becoming more competitive, and he sees the time frame for such loans (e.g. a 3- to 6-month period of improved performance) will “be getting more compressed.”
In summary, the mood of the 250+ attendees at this morning’s event suggested that 2010 will not be a year in which we will be saying “the commercial lending market is back”. Rather, there was agreement that the market has stabilized, and is unlikely to get worse, but real growth is still a year away.
Jamie Grant, April 27, 2010