The loan dilemma

December 15, 2009
Barack Obama wants the banks to start lending again:

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Barack Obama wants the banks to start lending again:

This is something I hear about from business owners and entrepreneurs across America — that despite their best efforts, they’re unable to get loans.

I would love to see some empirical data on this, because I suspect that insofar as lending volumes have dropped, it’s more a function of reduced demand than newly-recalcitrant bankers.

Tom Lindmark points to a Deutsche Bank survey of small businesses which puts availability of credit way down the list of problems, and “poor sales” easily at the top. During the credit boom, maybe small businesses, facing a drop-off in sales, would try in the first instance to cover the gap by taking out a bank loan. But nowadays people are much more aware of the dangers involved in taking out a loan you can’t afford to repay: if your business is losing money, borrowing more only makes matters worse. Borrowing for productive investment makes sense; borrowing to cover an operating shortfall does not.

What’s more, I’m still convinced that overall there’s too much credit rather than too little, and that over the long term we want to see a less levered economy, with less debt and more equity. Releveraging now is not helpful in terms of achieving that end, even if it does provide a short-term boost to GDP.

At the same time, there’s been an interesting shift in the leveraged loan market, with its $431 billion of loans coming due before 2014. The banks haven’t done much to address the problem — but the borrowers have, by refinancing into longer-term high-yield bonds. Vipal Monga reports:

Among the most popular avenues for balance sheet restructuring is the high-yield bond market, where companies such as Apollo Management LP- and TPG Capital-backed Harrah’s Entertainment Inc. have been issuing longer-dated bonds to pay off loans. Standard & Poor’s Leveraged Commentary & Data unit notes that so far this year about $20 billion of loans have been refinanced in this manner.

All in all, LCD estimates that this year’s work on the 2012 through 2014 maturities (which includes debt pay-downs, high-yield takeouts, defaults and the amend-and-extend activity that has allowed some issuers to push out maturities) has lowered by 17.2% the total amount of loans due by 2014.

This doesn’t solve the problem, of course, but it does make it slightly more manageable. And when debt is being held by real-money investors rather than by leveraged banks, the systemic consequences of a big wave of defaults are seriously reduced.

None of which means there aren’t huge problems with banks’ loan books. Mike Phillips notes that £14 billion (about $23 billion) of highly-structured RBS commercial-property debt is coming due in 2010, with RBS declaring that it has no intention of refinancing those loans when they come due:

It is a fair assumption that a lot of the borrowers within that £14bn will next year be asking other banks to refinance large, complicated loans that are probably under water.

Even if the current market recovery continues, that is not a likely prospect. This could be one of the first places where we find out what happens when the unstopable force meets the immovable object.

I think it’s pretty obvious what’s going to happen: an entirely predictable, and predicted, wave of commercial-property defaults. The question is whether RBS has deep enough pockets to cope with them. And given that the UK government now owns 84% of the bank, the answer has to be yes.

Insofar as there are creditworthy small businesses out there desperate for funding, then, the banks should extend them credit: that will help create much-needed jobs and growth. But I’m not sure just how much demand there is for small-business loans with a high likelihood of being repaid. And more generally, I’m not sure that banks’ loan books shouldn’t be shrinking rather than growing.

Update: Ryan Avent adds some smart thoughts.


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