ABA Banking Journal - August 2011 - (Page 10)
the economy | by jeff herzog & boyd nash-stacey
Are leverage and C&I debt markets overheating?
C&I lending has rapidly expanded C&I loans as a fraction of GDP 0.13 in the past few months, raising con(vertical bars = recession) cerns that in combination with strong 0.12 capital inflows into high-yield markets, there is a credit binge looming. 0.11 Our analysis suggests that the current debt binge will not likely 0.1 overheat the traditional debt mar0.09 kets and commercial paper, C&I loans, or corporate bonds will stabi0.08 lize. Commercial paper issuance is well below pre-recession levels and 0.07 with abundant supply and limited demand it is unlikely to change in 0.06 60 65 70 75 80 85 90 95 00 05 10 the near future, given a moderate Source: Bloomberg growth trajectory. Also, nonfinancial corporate bond markets are on a stable trajectory with little change from pre-recessionary levels, eliminating traditional or non-traditional lendworries of institutional bingeing. However, the C&I loan market has bounced ing markets. Institutional leveraged back after its $356 billion decline from the peak established in October issuance is declining, C&I spreads 2008, growing 3.2% year-over-year in May. are incentivizing banks to extend Concerns over the growth of C&I seem inappropriate when compared with the corporate loans, and commercial ratio of credit outstanding to GDP (see chart). From a historical perspective, the paper remains lackluster, despite a C&I debt to GDP ratio was 8% in the first quarter of this year, which is below the recent stirring of growth in the maraverage ratio of 9%. It appears current corporate strategies are focused on longket. Further diversification away term stability rather than purely leveraging their capital. This is apparent in both from CRE could prompt traditional the run up in C&I lending and the fundamental shift in leveraged lending from lenders to increase leveraged activleveraged buyouts to capital reinvestment and debt refinance. Furthermore, both ity; however, increased regulatory C&I delinquency rates and charge-off rates are declining, suggesting that the risk requirements will deter any speculain this loan category is steadily improving. It appears these markets are making tive run-up in the near future. intrinsic corrections without the need for policy intervention. Regarding leveraged loans, curAdditionally, a growing concern has emerged that institutional investors rent margins are tight, but the low are shifting to high-yield leveraged loan markets, in search of above-market volume of institutional leveraged returns, indicating a possible glut in leverage supply of funds. However, a issuance assuages worries of good recent exodus of capital and weak corporate demand are both facilitating money chasing after bad. n the moderation in leveraged markets, maintaining what appears to be a more sustainable path. Prior to 2007-2008, institutional investors flooded the Jeff Herzog top and Boyd leveraged loan market. Financial innovation in the form of more complex Nash-Stacey are economists in syndicated loans and CDOs facilitated the expansion of a risky investment BBVA Bank’s Research Group pool. However, today’s institutional investors, after the disastrous fallout in in Houston, Tex. 2007-8, are not returning to old habits. Bottom line: Our analysis does not suggest there is instability in either
10 | ABA BANKING JOURNAL | august 2011
Table of Contents for the Digital Edition of ABA Banking Journal - August 2011
ABA Banking Journal - August 2011
ABA Community Banking
Pass the Aspirin
Cover Report: Branch Banking
Branch Design Portfolio
Will Local Players Win Reverse Mortgage Turf?
ABA Banking Journal - August 2011