That said, GDP may not be a good leading indicator of credit conditions. After that period of easy credit cited above, for example, GDP growth continued to be strong in 1999, dipped just a bit in 2000, and didn’t slump with any drama until 2001 — well after bankers began tightening their lending programs. Industrial production, by contrast, peaked in 1997, comfortably preceding not only the tightening of the bank-credit market but also default rates in the U.S. high-yield bond market (see “As Goes Growth” at the end of this article).
Other developments that could signal a tightening of the bank-credit market would be a slowdown in either consumer or business spending or a sharp decline in the housing market. Consumers have been driving the economy for some time now, but they may be tapped out. Wage growth won’t pick up without stronger employment trends, and those won’t rise unless business spending does. The Commerce Department recently reported that construction of new housing units fell 8.9 percent in December, leading some economists to predict that the torrid growth there is now behind us.
Some credit analysts also suspect that if there is an uptick in defaults in the high-yield bond market this year, banks could become more leery of lending; others argue that bankers, being closer to borrowers than bondholders, would begin tightening even before that happened. The former group has undoubtedly noticed that even though the high-yield default rate remained low in 2005, it was twice the rate of 2004. Also, Fitch reports that during 2005, the volume of defaulted debt bottomed out in the second quarter, then grew in both the third and fourth quarters.
Much depends on the concerns of bank regulators, particularly at the Office of the Comptroller of the Currency, Martin Fridson, CEO of FridsonVision, an independent research firm, told a recent Standard & Poor’s conference on credit. At present, Fridson said, the regulators are “clearly more concerned” about mortgages than corporate loans. He said he expected that eventually to change, “though [the new policy] won’t be published when the change occurs.” For now, though, lenders aren’t expecting anything to slow the bank-credit market in 2006. Meredith Coffey, director of analysis at Reuters Loan Pricing, says lenders surveyed by her organization expect loan volume this year to outpace last year’s record levels.
Seize the Day
Like last year, look for much of the borrowing demand this year to come from refinancing of existing debt. Despite a late surge in borrowing-fueled M&A activity, nearly two-thirds of all borrowing last year came from companies like Barnes Group that were taking advantage of market conditions to lock in favorable terms and, in some cases, bigger lines of credit. BBB-rated Sealed Air Corp., for instance, put a three-year, $350 million credit revolver in place in 2003. Last June, the $4.1 billion packaging-products company refinanced early, boosting the revolver to $500 million and extending the maturity to five years. The Saddle Brook, New Jersey–based company also refinanced a syndicated facility in Australia and New Zealand. Treasurer Tod Christie says he was able to negotiate a loosening of the covenants on the company’s revolver, a lower facility fee (the fee paid simply to maintain the revolver), and a lower spread against LIBOR on any funds it actually borrows under the revolver.