Have the Green Shoots Turned to Brown?

Posted on June 26, 2009

As I write this, summer has officially begun with 100° plus days to prove it.  The past two summers have not been kind to the financial markets.  The collapse of the leveraged loan market in August 2007 marked the beginning of the current financial crisis and July of last year witnessed the initial low for collapsing bank stocks, setting the stage for much more dramatic pain in the fall.  I’m not predicting any surprises for this summer, just suggesting that we’re in the witching hour and should all be on the lookout for things that go bump in the night.

The jury’s still out on the shape of the recovery.  I have been expecting a W shaped recession, with economic strength appearing later in the summer to be followed by another step backwards toward the end of 2009 or sometime in 2010, as the impact of the financial stimulus wears off.  Recent events have increased my concern that the economic trajectory in coming months could look more like a landing between two flights of stairs on the way down.  There’s lots of reason to think that the decline is leveling out, but much less reason to expect a strong upturn.  Consumer credit is just too weak and, with many consumer balance sheets irreparably broken and consumer credit standards showing no signs of easing, it’s hard to see what will serve as the engine for growth.  At this point I’d be pretty happy with an L-shaped recovery in which we maintain something like current activity levels (perhaps after a short bounce off the bottom) while balance sheets are given time to recover.

For a good overview of the current condition of the real economy I suggest this article by Steven Hansen in Seeking Alpha.  Bottom line is that the economy is still in decline, … read the rest

Categories: Economics, Uncategorized

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The Worst of Times – the Not So Worst of Times

Posted on June 26, 2009

The recently released Brookings Institution Metro Monitor confirms something I have thought for some time; the recession’s impact has been very different in the Central U. S., including Memphis, where I live.  Certainly unemployment is up, but there is no feeling of impending doom or of pervasive despair.

Fourteen of the strongest twenty metros in the report are in Texas, New Mexico, Oklahoma, Arkansas, Iowa or Kansas.  Memphis and its neighbor to the south, Jackson, MS, are in the second quintile.  Housing prices in Memphis were flat from Q1 2008 to Q1 2009 and they were actually up in many of the Texas markets.  “What’s going on here?” you might ask.  Certainly the regional focus on agriculture and energy, which remain relatively strong, doesn’t hurt, but I don’t think that’s the primary issue.  The mid-continent never enjoyed the full force of the Bubble to the extent experienced on the coasts, so we just didn’t have as far to fall.

This recession is proving to be a great leveler.  My guess it that this applies not just to states and regions, but to economic strata as well.  All that data which Robert Reich and others use to deplore a growing concentration of wealth at the top, has likely turned dramatically down over the past year as portfolio values have collapsed and outsized bonuses have become the bête noir of the American economy.  For the first time in my thirty-six year career, fear stalks the halls of the major law firms as hundreds, perhaps thousands of six figure associates and more than a few seven figure partners have been laid off by some of the largest and most prestigious law firms in America and similar impacts are being felt throughout the higher end of the economy.

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Commercial Lending – Schizophrenia Reigns Supreme

Posted on June 26, 2009

senior-loan-officers-survey

Many companies remain under pressure from their lenders, but we have seen recent signs that selected lenders are becoming more aggressive in offering new loans to credit-worthy borrowers.  We are quite active in helping companies find senior debt to replace existing lenders and are getting good response from selected lenders, primarily banks that were less impacted by the financial crisis and independent asset based lenders.  In prior years there was little or no need for an investment banker’s assistance in arranging senior facilities, as multiple lenders (both banks and non-banks) aggressively chased all but the worst of credits.  That is no longer the case; today senior deals take a lot of work and persistence, but they can be done.

To summarize the current situation:

•    At the higher end, the loan syndication market remains catatonic with no signs of near term recovery.  This both reflects and creates the almost complete collapse of the Private Equity acquisition market for the larger deals north of $100 million.  Most syndication activity that does occur relates to restructuring of existing credits.

leveraged-loan-maturities
Source: Churchill Financial and Standard and Poors

As the chart above demonstrates, we’ve only seen the tip of the iceberg in leveraged loan maturities.  The peak years for refinancing/renegotiation of the loans created in the buyout boom are 2013-2014, but we are already seeing a strong increase in the number of buyout bankruptcies.  This five year overhang in potentially troubled leveraged loans, means that we are a long way from cleanup of the problems created by excessively liberal lending practices during the buyout bubble.  This indicates that we are unlikely to see another debt fueled boom in the buyout industry before we are well into the 2010’s.  The chart below provides a dramatic demonstration of the extent of the decline in syndicated loan volume, with very little … read the rest

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