I didn't see any CFOs on the 37th floor of the Standard & Poor's building Thursday, where a panel of experts in the leveraged credit markets discussed where bank and institutional lending is headed. But if any had been there, the dialogue would have warmed the cockles of their hearts.
While snow and rain pounded Wall Street, a glint of sunshine showed in the discussions about the availability of capital to corporations. To start out, S&P banking analyst Vandana Sharma pointed out that commercial and industrial loan portfolios were one of the brighter spots for banks in the fourth quarter of 2009, with noncurrent loans declining 7%. It was the first drop in NCLs in three years, Sharma noted. Then, Martin Fridson of Fridson Investment Advisors, bond investor extraordinaire, plainly started (sans any irony) that there was no reason to expect companies' credit situations not to improve.
Forecasters predict corporate defaults will drop to as low as 4% by year-end, after hitting the mid-teens last year. But even with loads of defaults in 2009, loan investors have had decent recoveries on defaulted borrowers, the panelists said, so the financial crisis "will not break the investment thesis for bank loans," said Scott Page, vice president of Eaton Vance.
And what about that wall of corporate refinancings expected to overwhelm the markets from 2011 through 2014? It's not a big a threat as imagined, Page said. "I tend to look at it on a company-by-company basis," he explained. "Solutions will be found as [refinancing] problems arise." Some of those solutions: loan-market and bank-provided capital being replaced by bond issuances, financial sponsors infusing their portfolio companies with equity, and investment-grade companies acquiring distressed assets.
There are two problems however, that no one had a good answer to. One, what will replace the $300 billion of annual appetite in the corporate loan markets that came from now-near-dead collateralized loan obligations? Don't count on hedge funds or mutual funds, the panelists said, because they have retreated from less-liquid investments. The bond markets are the big hope, but therein lies the second difficulty. Huge inflows into bond mutual funds backed record issuance of high-yield bonds in 2009, said Michael Zupon, founder of Sound Harbor Partners. But when interest rates start to rise, bonds don't look like such a hot investment. That situation could "change the dynamic for corporate credit," he said.
It will be incumbent on central banks to keep interest rates as low as possible as the refinancing cycle hits, Zupon argued. But with government deficits accelerating, central banks, especially the Federal Reserve, may not be able to control rates for much longer. "Market forces may take [the] tools out of their hands," Zupon said. So the picture for corporate financing may not be that bright after all. But in contrast to a gloomy, wet day in Manhattan, it sparkled. |
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