Money for Nothing

Bank credit is easy, maybe too easy. Don't pass it up.

To their credit — or eventual chagrin, should it turn out that they’ve been too aggressive — banks have been successful at whipping up business. Reuters Loan Pricing Corp., which tracks and analyzes global credit markets, reports that U.S. loan issuance, including revolvers, hit a record $1.5 trillion last year. That included a record $500 billion–plus in leveraged (non-investment-grade) lending and a second-highest-ever $669 billion in investment-grade lending. Among the incentives banks offered to make that happen: low prices. Tim Houlahan of Wells Fargo Syndications and head of origination and structuring for the U.S. corporate banking segment, says average loan pricing in the BBB market was down about 40 percent from 2003, driven in part by strong lender demand for funded assets and low default rates. Price declines weren’t as dramatic for higher investment-grade borrowers, in part because many of these facilities are established to back up commercial-paper issuance and have historically been tightly priced. Meanwhile, banks have been willing to extend credit for longer terms. In 2002, Houlahan says, about 70 percent of syndicated loan volume was issued on a 364-day basis; now, less than 10 percent of loan volume is issued for that term. Five-year terms are readily available for both investment-grade and leveraged borrowers, and some banks have even offered six- or seven-year terms for some clients.

Debt-market analysts credit all this easy money for keeping the high-yield bond market frothy and high-yield default rates modest. According to Mariarosa Verde, managing director of credit market research for Fitch Ratings, 20.5 percent of the debt issued in the high-yield bond market last year was floated by companies with non-investment-grade ratings of C, CC, or CCC, the lowest ratings Fitch assigns for anything other than bonds that have already defaulted. By contrast, companies with such dire ratings accounted for only 10.1 percent of new high-yield issuance as recently as 2003. Still, with corporations able to feed at the bank-credit trough, high-yield default rates remain low. Verde says only 1.5 percent of the market defaulted in 2004, by volume, and only 3.1 percent in 2005, down from 16.4 percent as recently as 2002.

How Long Can It Last?

The key question, of course, is how long can these good times roll? To a large degree, it depends on the economy. As long as GDP growth remains strong, corporate profits should follow suit and this credit utopia should be able to extend its run. Many economists expect GDP to show solid growth again this year, albeit down a shade from last year’s 3.5 percent clip. Credit analysts and corporate borrowers alike suggest that, absent some dramatic event — a major terrorist attack, say, or an iconic U.S. company defaulting on its debt — the bank-credit spigot should remain wide open at least through the remainder of this year. Even the Federal Reserve’s campaign to raise short-term interest rates isn’t expected to have too much impact on the demand for or availability of bank credit (see “The Fed on the High Wire” at the end of this article). “For this kind of lending, the absolute level of interest rates is probably not a big determinant of activity,” says Brad Hardy of Wells Fargo. “Most clients need the backup facilities and access to liquidity, so they will put something together regardless of rates.”


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