Wednesday, May 8, 2013

As lenders look for ways to deploy capital, small businesses benefit

US corporations are enjoying some of the lowest borrowing costs in history. Even the more leveraged (high debt to earnings ratio) large and middle market companies are "fighting off" lenders willing to provide cheap credit. Junk loans now yield 3-5% and spreads are continuing to tighten.

Source: LCD

Existing loans are being "repriced" (converted) into debt with lower rates and looser covenants.
LCD: - Falling new-issue spreads spurred a new round of opportunistic deal flow. In April, issuers cuts spreads on $36.7 billion of institutional loans, up from $24.7 billion in March. In all, issuers have now repriced $155.7 billion of loans, or 28% of the S&P/LSTA Index, by 115 bps on average.
And a great deal of this demand is coming from shadow banking - Business Development Corporations (BDCs), CLOs, and even credit hedge funds (see story). How can US chartered banks (under regulatory pressure) possibly compete when credit for large and mid-market firms is so readily available and so cheap? One way is to expand lending into smaller business space, where sanity still prevails with respect to rates and leverage levels. And that's exactly what banks have been doing. The latest data from the Fed shows banks easing on underwriting standards for small company loans...

Source: FRB ("C&I" stands for commercial & industrial - meaning corporate as opposed to retail loans)

... and tightening spreads.

Source: FRB

While this development is great news for small businesses and the US economy as a whole, it shows that credit may be approaching frothy levels. All this new liquidity from the Fed has to end up somewhere.
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