July 2019 - How to say "no" and how not to say "no"

Lenders pay attention – how you say “no” to a loan request often says more than how you say “yes”.

In a marketplace, everyone is watching and paying attention all the time. We do not operate in a vacuum. Borrowers, investment bankers and other lenders pay attention to how lenders operate. They are paying attention to how you say “no” as much or more than how you say “yes”. There is definitely an art to how to say “no” to a loan request. In many respects, it is harder to decline a loan request effectively than it is to approve it. And the memory of declined loans can leave as significant of an impact as loan approvals.

July 2019 - Market Research and Commentary

In the wake of trade tension and recent tariffs, global markets have been in a state of limbo. In both debt and equity markets, different indicators have given investors mixed signals about the state of the global economy. These mixed signals, in conjunction with the China-U.S. trade conflict and other geopolitical tensions that we discussed in our June newsletter, have left global markets in an uncertain state as summer begins.

June 2019 - The challenge of being a leader in 2019

Lending is always about finding an equilibrium between the search for profit and the avoidance of losses.  A lender’s platform stands at the fulcrum between risk and return.  Each loan comes with risk, as well as risk management.  We need lending for growth, but inevitably that growth leads to excess, which produces losses, which often leads to some type of crisis.

Ignorance may be bliss in the short-term, but lenders don’t get paid to be ignorant.  In fact, they will pay a hefty price if they are ignorant.  They must ask questions, perform due diligence, pay attention to a multitude of factors and create an effective monitoring structure for all investments.   

So as the current credit cycle lumbers through its umpteenth year of steady growth in lending, as leveraged finance companies continue to show low default rates, no signs of relief from intense competition and pressure to deploy capital, as budget deficits grow larger and larger, all amidst a slowing global economy and warning signs about future economic growth, the challenge of being a lender is truly as substantial as ever in the summer of 2019.

Increasing the debt to record-breaking levels was a calculated risk taken by policy-makers, lenders and borrowers alike.  We knew what we were doing, but the alternative of economic stagnation was unpalatable.  Short-term pleasure is always hard to resist, in all facets of life, personal and professional.

We believe that it is during times like this that commercial lenders have a real opportunity to differentiate themselves.  The lending decisions that are made now will determine the long-term winners and losers. Faced with the formidable challenge of balancing the necessities of capital preservation, prudence to investors and the search for growth and profits, it is during the late stages of a credit cycle that the best lenders will stand out. By focusing on disciplined underwriting, customer service and rigorous adherence to core principles, the best of breed lenders will survive and thrive, in both the short-term and the long-term, no matter what future periods bring to bear.

No matter what happens to the economy locally, nationally and globally, the best lenders will stand out by serving their various constituencies and staying consistent, active and responsible.  Lenders have to keep lending and not make knee-jerk reactions, while at the same time accepting the realities of the current marketplace.  Hard work, hustle and discipline always pay off in the long run for all market participants, for lenders and borrowers alike.

June 2019 - Market Research and Commentary

This month’s research analyzes the current state of the U.S. economy and how the trade impasse with China is affecting the credit market. The uncertainty caused the yield curve to invert again in May but a strong jobs report and Q1 GDP numbers give confidence that the economy is still growing. As the research will show the uncertainty and the proposed tariffs will have a greater effect on consumers and businesses are already delaying capital expenditures. The encouraging economic results will be hard to replicate in the coming quarters if the trade dispute continues through much of 2019.

June 2019 - Chart of the Month

Source: The Wall Street Journal

Source: The Wall Street Journal

As the trade dispute between the U.S. and China enters more uncertain territory the effects are disrupting economic activity and the capital markets. Above, analysis by the WSJ shows the expected tariff on broad categories of goods in the U.S. The chart to the right shows the decreased CAPEX by S&P 500 companies in Q1 2019 as compared to 2018. If the U.S. economy is to come anywhere near the growth rates of 2018 businesses will needed to continue spending. Below is the increase volatility in the market as measured by the CBOE’s VIX. Uncertainty surrounding tariffs grew in May and with the deal still dragging on, investors have been more risk-averse.

Source: FRED

Source: FRED

May 2019 – You can learn to be a good borrower

Lending situations are simultaneously transactional and relational in their orientation. Most of us are borrowers right now and many of us are lenders. Whether you realize it or not, you have a relationship with your lender, with all of your lenders. It may be a relationship that is mostly transactional in nature, as is the case with most credit cards, but there is still a relationship there. With commercial lending situations, the pendulum swings much more to the relationship end of the spectrum. And that relationship, like any relationship, is between human beings. As we like to often say – banks/lenders don’t make credit decisions, people make credit decisions. Therefore, having a good relationship with your lender is essential. To reiterate, all borrowers and lenders have a relationship, whether they believe it or not

May 2019 - Market Research and Commentary

This month’s research analyzes the credit conditions facing the consumer and the conditions facing the commercial space. Following a yield-curve inversion in Quarter 1 , the 10-year yield has regained yield and its yield is now greater than the 3-month. This inversion is having ramifications for both the consumer and the business as our U.S. and global economy activity remains tightly correlated to the availability and price of credit. Some areas of credit such as credit cards have tightened substantially while on the business side, leverage has remained relatively stable.