The questions on the previous page are
ones that we have all thought about
over the last couple of months. Whether
an asset-based banker or other lender,
leveraged-capital provider, private
equity sponsor, bankruptcy specialist, turnaround professional, attorney,
appraiser, investor or borrower, all of
us have a vested interest in functioning capital markets and the answers to
these questions. This article attempts
to provide meaningful answers to these
important questions and an outlook on
what’s to come.
real estate loan holdings. This phenomenon will result in a spike of hiring back
into jobs that were eliminated in 2008
and 2009, particularly loan originators.
My advice to those lenders now working
at turnaround-consulting firms or on the
beach is to dust off your resumes and
start your engines. I think banks will be
hiring in Q2 and Q3 of 2010.
The Basics for 2010
Money-center, super-regional and
regional banks will aggressively reenter the commercial and industrial
loan market.
Fed should be inclined to keep interest
rates near zero for most of 2010.
High-yield issuance is likely to continue
at elevated levels.
An area of the leverage loan market that
will be particularly attractive is the
middle market.
Large, mid-size and small banks will
participate in the Great Renewal of
the ABL business in 2010.
The new bankruptcy landscape will be a
much shorter process.
Will unemployment improve?
Unemployment is hovering around 10%
and will probably continue to do so.
The lack of change in the unemployment rate will be due in large part to the
fact that many workers have stopped
looking for work. When we include the
number of unemployed workers who are
not actively seeking new employment,
the real unemployment rate is and will
remain in the neighborhood of 17.5%.
That means the U.S. economy will need
to create 150,000 new jobs per month
just to absorb those returning to the
labor market. The continued lackluster
job growth, which will likely extend well
into 2010, will place downward pressure
on wages and help moderate any inflationary tendencies from the massive
government intervention and stimulus
we witnessed in 2009.
Banks, however, will wake up to
the fact that they need to grow assets and create spread income again.
Market share and league table rankings
will again be meaningful statistics in
Monday-morning management committee meetings. This revelation will
probably occur in mid- to-late Q2 2010.
As a result, large money-center banks,
super-regionals and regional banks will
aggressively reenter the commercial
and industrial (C&I) loan market as they
attempt to deemphasize and diversify
away from real estate assets. The smart
money is betting on the banks that will
be able to grow their C&I loans quickly
at attractive spreads while increasing
deposits and reducing their reliance on
Where will interest rates go?
In 2009, the Federal Reserve (Fed) decreased the fed funds rate to near zero,
a historic low. This dramatic reduction
was intended to prevent the economy
from sliding into a depression. With the
economy now largely stabilized, the
question becomes how much longer
the Fed will allow the fed funds rate to
remain near zero.
It appears that the Fed is inclined to
allow interest rates to remain near zero
for the foreseeable future. As scholars of
the Great Depression point out, the Fed’s
willingness to raise interest rates as
soon as the economy demonstrated sustained growth and viability contributed
to the second, more painful economic
downturn in that period, which many
people believe ultimately caused the
Depression to drag on even longer. To
avoid any threat of causing the same
sort of event now, the Fed will be willing
to tolerate the potential inflation risks
in order to force economic growth.
In addition, low interest rates appear
to be helping stabilize the economy. For
example, low interest rates have translated into lower rates for consumers on
everything from credit cards to home
mortgages and home equity loans. These
lower interest rates encourage consumer spending, economic growth and,
more important, an increase in home
purchases, which ultimately drives the
U.S. consumer economy. Finally, many
companies, including small businesses,
already have and will be able to take
advantage of lower interest rates to
refinance their debt.
For these reasons, and given the slow
pace of recovery to date, the Fed should
be inclined to keep interest rates near
zero for most of 2010. In late Q3 and
