the tsl interview
But the reason I was bringing that
up is that the market for companies
that used to securitize their accounts
receivable has dried up. A lot of them
used to do it through investment banks
and other lenders who would securitize
them through a special-purpose entity
and then do it off balance sheet by selling them and raising commercial paper.
And when that market dried up, a lot
of these companies still wished to sell
their receivables and get them off their
balance sheet, but, because there isn’t a
secondary market to go to, those banks
that have the balance sheet capability
to do it are finding a whole new series of
opportunities there as well.
I know that we’re doing a lot of
those in Wells Fargo Foothill, but we’re
also doing a lot of them through our
accounts-receivable purchasing group,
where we’re just buying these receivables outright. And these are definitely
companies of a higher caliber than we
would have seen two years ago.
How do you see the rest of the
year playing out as far as Wells
Fargo Business Credit and also the
economy in general?
For this year, I think what we’re seeing is
what probably a lot of people are seeing,
and that is a much higher level of business failures than in prior years. We’re
seeing more liquidations because there
isn’t as much M&A activity or buyers out
there looking to buy distressed companies as there were two years ago. And
as a result, losses are going to be higher
this year than what they had been for
the past couple of years.
That’s the bad news. The good news,
in our case and I’m sure many others, at
least as far as we can see at this point, is
that we’ve been able to more than compensate for that increase through higher
spreads. We are finally able to get reasonable pricing back. Two years ago, the pricing in this industry got so horrible it was
repulsive. Again, the risk-reward was way
out of whack. Two years ago, you could
hardly afford to have any losses based
on the spreads because it just wouldn’t
absorb them. However, that’s changed
dramatically. There’s less in the way of
competition today. But more importantly,
you have companies that have defaulted.
And, if you have your loan agreement
structured appropriately, you can adjust
your risk-reward ratio more appropriately
when those events do occur now. Two
years ago, if your company defaulted and
you tried to invoke a default rate, they’d
leave. They’d go to another bank and get
more money at a lower rate. Today, that
opportunity isn’t there. And not that anybody’s trying to be heavy handed about
it, but it’s just a different risk-reward
ratio. When you have companies that
are in default, you should be paying a bit
of a premium to adjust for that fact. So,
fortunately, the spreads—at least those
that we can see so far—are more than
compensating for whatever step-up we’re
going to and are experiencing in losses.
As it relates to where we see this
year, from an economic perspective, I’m
looking at the glass half empty. You look
at everything around you today—and
I’m talking short term, like for the rest of
this year—there’s still a tremendous surplus of housing on the market. The best
estimate that I’ve heard lately is that,
in order to get that inventory down to
more normal levels, you might be looking at 18 months plus or more. And so
that doesn’t bode well for new housing
starts. I think the issues in commercial
real estate are just starting to be felt,
and it will get worse before it gets better. We’ve had a tremendous contraction
in retail, and that’s backing up on the
holders of the real estate.
There’s significant excess capacity,
certainly in retail and other areas of
commercial real estate.
As far as automotive is concerned, the
estimates are nine-to-ten million cars
sold per year for the next year or two.
They’ve been running at 16.
And when you take an industry like
that, even with a lot of the legacy issues that American auto makers have
brought on themselves, that’s a pretty
hard thing to adjust down to, and all of
the feeder industries that go into that.
So, in some states you’re looking at
unemployment that’s starting to push at
almost two digits.
I don’t see anything in 2009 that
would tell me that we’re going to see
anything close to economic growth. I just
see, frankly, more contraction in 2009. I’d
settle right now for anytime in 2010.
We were living a little too high off the
hog. I think our housing industry was on
steroids. And even with all the stimulus
packages and everything else, the way
the recovery works and the American
economy works is similar to going on
a diet: you have to take care of the
excesses, and no amount of government
stimulus or intervention is really going
to necessarily change that dramatically.
You can just try to minimize the damage.
And again, that provides opportunities in our business as well. You’re going
to have to work a little harder to sift
through your applicants. And you’re
going to have to really sensitize your
projections downward. But, at the same
time, if you can find those companies
with staying power and good management that can minimize cash losses,
it’s going to give those lenders with a
propensity to do that an opportunity to
grow some market share. TSL
Michele Ocejo is executive editor of
The Secured Lender.