◗;Aladdin Credit Partners recently raised
$570 million to provide DIP to POR credit
facilities in the middle market and institutional market. It is looking at first- and
second-lien enterprise value term loans
and working-capital financings.
◗;Avante Mezzanine Partners in Los Angeles recently raised a fund that invests
$5 million–$15 million in subordinated
debt and minority equity.
◗;ICON Equipment and Corporate
Infrastructure Fund is focusing on
stand-alone term loans on M&E and real
estate starting at $5 million. To date,
ICON has invested more than $3 billion
in equipment financing.
said that the cashflow and second-lien marketplaces won’t return to normal until securi-tization returns — whether that’s mortgage,
car loan or credit card securitizations.
The refi market is still fairly quiet. Banks
that are sitting on loans in forbearance are
not moving them off the books; they want
to keep the interest income and improve
the likelihood of a full recovery. And there
is always the concern for the new lender
thinking, “Gee, what does the incumbent
lender know about this credit that I don’t?”
In the high-yield market, companies left
for dead in 2006 have investors clamoring
for their debt issues. In all, companies raised
$11.7 billion in the second week of January
2010, the biggest in history, according to
Thomson Reuters. For most issuers, the
new debt isn’t going to build new factories
— instead, the new debt is pushing back
maturities of other debt, buying the com-
panies more time to improve operations
and ride the economic recovery. In a reprise,
some private-equity-backed businesses are
paying dividends out of new bond issues.
Reader’s Digest even plans to finance its
exit from Chapter 11 with junk bonds, the
first company since 2005 to do so.
In past economic recoveries, many re-
gional and local banks played a prominent
role in financing lower middle-market
companies. Basing part of their credit deci-
sions on their personal relationships with
owners (and some boot collateral such as
real estate), many regional and local banks
provided “ABL-lite” credit facilities to recov-
ering companies. This was especially true
if the borrower had a breakeven year (from
a P&L standpoint) as opposed to several
years of persistently deep losses. Often,
the regional and local banks would only
require monthly borrowing bases with
annual field exams and desktop or drive-by
appraisals on fixed assets. The loan was a
Continuing commercial real estate and
credit card woes will constrain the role
of regional and local banks in financing
America’s recovery in 2010–2011. Some in-
dustry observers have stated that commer-
cial real estate and credit card losses have
crested, but, by all accounts, this could be
one river that’s going to stay at flood levels
for a long time to come. The role of many
regional banks may be limited to buying
participations in gold-plated syndications
for the foreseeable future.
that liquidation is a far worse outcome. This
is particularly true with lending relationships
that are heavily weighted toward term loans,
where the forced liquidation values are too
ugly to think about.
“This has created a big spread between
the bid-ask for C&I loans. Banks are selling
real estate loans but hanging on to C&I
loans,” according to CJ Burger, managing
director of Summit Investment Manage-
ment in Denver. “With interest coverage
tests so easy, many underperforming com-
panies have been given breathing room,”
said Burger. “There’s a lot more wood to
be chopped in these companies from the
standpoint of operating performance.”
Banks can’t kick the can down the road
forever — the OCC has finite tolerance to
amend and extend strategies.
One common theme in conversations
with many industry veterans is that the
“ 3 Cs of lending” (character, collateral and
credit) got lost during the 2003–2008 credit
bubble. Everyone managing an ABL group
or portfolio ardently hopes that this discipline won’t get lost in this upturn.
In 1912, John Pierpont Morgan testified
before the House Bank and Currency Committee. He was questioned by Special Counsel Samuel Untermyer, and the following is
their famous exchange on the fundamentally psychological nature of banking:
Untermeyer: Is not commercial credit
based primarily on money or property?
Morgan:;No, sir. The first thing is character.
Untermeyer: Before money or property?
Morgan:;Before money or anything else.
Money cannot buy it… a man I do not
trust could not get money from me on
all the bonds in Christendom.
Nine months later in 1913, the Federal
Reserve replaced Morgan’s “Money Trust”
as a lender of last resort in the banking
Many lenders have large portfolios of commercial and industrial problem loans where
the borrowers are largely treading water.
We know one regional portfolio manager
with 250 problem loans that has experienced
only five bankruptcies in the past 12 months.
Most of the loans are placemarked by forbearance agreements with the knowledge
Hugh C. Larratt-Smith is a managing director
of Trimingham International, Inc. He is on the
Advisory Board of CFA’s Education Foundation.
Joseph A. Vuckovich, JD, is a director in
Trimingham International, Inc.’s Philadelphia office.
He earned an AB from Harvard University, and a
JD from New York University School of Law.