Story first appeared on WSJ.com
Small-business lending has been in trouble, but is there an explanation beyond the widespread perception that banks are denying credit, and starving small entrepreneurs?
Clearly, the financial crisis and recession whacked banks and curtailed lending to small companies. Lending still hasn't returned to prerecession levels.
But here's an alternative view of the principal cause: A range of observers report that, in many cases, small businesses don't want loans. Their sales are so weak they can't justify taking on debt to expand operations.
Researchers at the Federal Reserve Bank of New York concluded that although a tightened credit supply constrained some small firms, weak consumer demand for the firms' products and services was a more pressing factor for small businesses during the recession.
Those struggles continue and will only be exacerbated by Thursday's stock-market selloff. The more the economy teeters, the weaker consumption gets.
In a survey conducted by Gallup, the NFIB asked the nation's small businesses, defined as 250 employees or less, to name the most important finance problem facing your business today. About 29% said bad sales, 26% unpredictable business conditions, 14% said they didn't have finance problems, and just 12% cited an inability to obtain credit.
Small businesses are critical to the U.S. economy because they employ about half of the people working in the private sector and generate an outsize share of new jobs.
Many banks tightened credit during the recession, and many small businesses couldn't—and still can't—qualify for loans or gave up trying because their books turned sour. The drop in the value of real estate, often used by small businesses as collateral for loans, has also hammered them. Start-ups have been particularly hard hit.
Still, the abiding problem appears to be a lack of customers.
The U.S. Chamber of Commerce polled small-business executives on the main challenge facing small business owners, and just 3% of the respondents said "lack of credit."
The National Small Business Association, which has 150,000 members, released a survey this week that said 36% of small businesses report an inability to garner adequate financing. Asked how that compares with past years, a spokeswoman for the group said the figure has averaged 32% over the past 17 years.
For the added 4% who had trouble getting a loan, it is indeed bad news. But it doesn't suggest a new credit crunch.
Banks need to lend to stay in business, and as their customers retreated, some bankers have pursued them.
Huntington National Bank of Columbus, Ohio, says it has added more than 150 small-business bankers in the past 18 months.
A professor of economics at Case Western Reserve and a visiting scholar at the Cleveland Fed, says the role of tight credit shouldn't be underestimated. Demand for loans may be down, but supply is too. Among other things, banks are getting more scrutiny from regulators, and that can result in a tighter grip on loans.
Tighter is relative. If the comparison point is the prerecession years, those were loose days indeed. The NFIB says the vast majority of small-business owners it surveyed back then reported their last loan request was approved.
That's a benchmark that's unlikely to be replicated anytime soon.
Showing posts with label Bank Loans. Show all posts
Showing posts with label Bank Loans. Show all posts
Friday, August 5, 2011
Thursday, August 26, 2010
Europe Loan Growth Accelerates as Economy Recovers
Bloomberg / Business Week
Loans to households and companies in Europe grew at the fastest pace in 13 months in July after the economic recovery gathered steam.
Loans to the private sector rose 0.9 percent from a year earlier after growing an annual 0.5 percent in June, the European Central Bank in Frankfurt said today. That’s the strongest increase since June 2009. M3 money supply, which the ECB uses as a gauge of future inflation, increased an annual 0.2 percent in July, the same rate recorded in the previous month.
Strengthening global demand helped Europe’s economy expand 1 percent in the second quarter, the fastest pace in four years. Economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Orders for durable goods in the U.S. increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output rose the least in 11 months.
“It is encouraging that the annual growth rate of bank lending to the private sector is moving in the right direction,” said Martin van Vliet, an economist at ING Group in Amsterdam. “But overall demand for bank credit remains subdued. This highlights the fragility of domestic demand in the euro zone, and is a reminder not to get too carried away by the recent resilience of the euro-zone dataflow.”
Confidence
European confidence in the economic outlook rose to the highest in more than two years in July and business sentiment in Germany, Europe’s largest economy, unexpectedly increased to a three-year high in August, suggesting the recovery may not lose as much momentum as some economists forecast.
ECB council member Axel Weber said last week the bank is likely to raise its euro-region growth forecasts next month after the German economy expanded in the second quarter at the fastest pace since records for a reunified country began in 1991. The ECB in June predicted euro-area growth of 1 percent this year and 1.2 percent in 2011.
Still, a report today showed Italian consumer confidence fell in August to the lowest in more than a year as government austerity measures made households more pessimistic about the their ability to save.
According to the ECB’s latest Bank Lending Survey published on July 28, euro-area banks “anticipate credit standards on loans to enterprises to tighten somewhat in the third quarter.”
In the three months through June, M3 rose 0.1 percent from the same period a year earlier, the ECB said. M3 is the broadest gauge of money supply and includes cash in circulation, some forms of savings and money-market holdings. The annual rate of M1 money-supply growth eased to 8.1 percent from 9.2 percent.
Loans to the private sector rose 0.9 percent from a year earlier after growing an annual 0.5 percent in June, the European Central Bank in Frankfurt said today. That’s the strongest increase since June 2009. M3 money supply, which the ECB uses as a gauge of future inflation, increased an annual 0.2 percent in July, the same rate recorded in the previous month.
Strengthening global demand helped Europe’s economy expand 1 percent in the second quarter, the fastest pace in four years. Economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Orders for durable goods in the U.S. increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output rose the least in 11 months.
“It is encouraging that the annual growth rate of bank lending to the private sector is moving in the right direction,” said Martin van Vliet, an economist at ING Group in Amsterdam. “But overall demand for bank credit remains subdued. This highlights the fragility of domestic demand in the euro zone, and is a reminder not to get too carried away by the recent resilience of the euro-zone dataflow.”
Confidence
European confidence in the economic outlook rose to the highest in more than two years in July and business sentiment in Germany, Europe’s largest economy, unexpectedly increased to a three-year high in August, suggesting the recovery may not lose as much momentum as some economists forecast.
ECB council member Axel Weber said last week the bank is likely to raise its euro-region growth forecasts next month after the German economy expanded in the second quarter at the fastest pace since records for a reunified country began in 1991. The ECB in June predicted euro-area growth of 1 percent this year and 1.2 percent in 2011.
Still, a report today showed Italian consumer confidence fell in August to the lowest in more than a year as government austerity measures made households more pessimistic about the their ability to save.
According to the ECB’s latest Bank Lending Survey published on July 28, euro-area banks “anticipate credit standards on loans to enterprises to tighten somewhat in the third quarter.”
In the three months through June, M3 rose 0.1 percent from the same period a year earlier, the ECB said. M3 is the broadest gauge of money supply and includes cash in circulation, some forms of savings and money-market holdings. The annual rate of M1 money-supply growth eased to 8.1 percent from 9.2 percent.
Friday, April 16, 2010
FDIC Selling Busted Bank Loans on Terms That Make It `Hard to Lose Money'
Bloomberg
Wonder why we bailed the banks out
FDIC Offers Busted Bank Loans on Terms Buyers ‘Love’
Starwood Capital Group LLC, Colony Capital LLC and TPG, whose leaders profited from the 1990s savings and loan crisis, are among firms buying assets from the Federal Deposit Insurance Corp. for as little as 22 cents cash on the dollar, according to data compiled by Bloomberg.
The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals.
The government, which was faulted two decades ago for letting bank assets go at fire-sale prices, is planning to profit along with investors. Instead of selling the loans outright, the FDIC kept stakes of 50 percent or more in at least five loan portfolios sold since September. It’s also demanding as much as 70 percent of any gains.
“They are doing a much better job this time around,” said John Bovenzi, the FDIC’s chief operating officer until last year, who also helped unwind the S&L crisis. “They have learned a lot, and they aren’t making the same mistakes.”
Loan sales planned or completed in 2010 are on pace to reach at least $10 billion in book value by mid-year, matching the total for all of 2009. The FDIC arranged at least $860 million in interest-free financing this year to support deals, according to statements from the buyers. A new sale of FDIC- owned loans with a book value of $1.97 billion is scheduled for June, according to documents obtained today by Bloomberg News.
Failed Banks
The sales involve packages of loans acquired by the FDIC from 182 banks that failed since the start of 2009. The loans typically are tied to commercial real estate and residential development, and can include debt on which borrowers stopped making payments or property seized by the bank.
Terms entitle taxpayers to a share of any money that private investors squeeze from delinquent borrowers or any profit earned reselling the assets. The FDIC-backed debt has to be repaid before the private-equity firms can take any cash generated by the loans.
Financing doesn’t go directly to investors. Instead, the FDIC is creating limited liability companies that hold the loans being sold and receive the financing.
“It’s very hard to lose money on a transaction like that,” Sternlicht said on a Feb. 11 conference call with potential investors, according to a copy obtained by Bloomberg News. “That’s the kind of asymmetric risk profile you love in a deal.”
‘So Distressed’
Financing is made on a deal-by-deal basis and won’t necessarily continue, said agency spokesman Andrew Gray.
“The financing helps pricing,” FDIC Chairman Sheila Bair said in a March 19 interview. The packages include hundreds of loans where borrowers aren’t making payments. Some “may be so distressed that a healthy bank just does not want to deal with them,” Bair said.
Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has written more than a dozen papers on government bailout programs, said the FDIC’s zero-percent financing artificially inflates prices by as much as 20 percent and leaves the agency’s insurance fund vulnerable to losses.
The regulator may have to write down the value of its holdings if private-equity managers can’t recover as much from the loans as they expect, Wilson said. The agency could also lose money if its partners don’t make enough to repay the FDIC’s financing, he said.
“A better structure would not subsidize high levels of leverage, and it would eliminate the government’s stake entirely,” he said. That would also allow the agency to collect cash more quickly while reducing risk, according to Wilson.
Resolution Trust
Things have changed since Sternlicht, 49, oversaw a fund that bought assets from the Resolution Trust Corp., the government agency that sold loans and property of failed lenders in the 1990s. The RTC disposed of $394 billion of assets from 747 banks between 1989 and 1995, according to an FDIC review published in 2000. Back then, a fund Sternlicht managed earned about a 94 percent return on purchases including those from the RTC, he said in the February call.
This time when Starwood and its partners won a stake in a company holding $4.5 billion of unpaid loans, the FDIC added an “equity kicker.” It increases the agency’s stake to 70 percent from 60 percent once the Starwood-led group makes back twice its initial investment and earns a 25 percent internal rate of return, according to the regulator.
The loans Starwood will help oversee were once held by the failed Chicago lender Corus Bankshares Inc.
‘Real Partnership’
“Structured loan sales benefit both investors and the U.S. taxpayer,” Sternlicht said in a telephone interview. “There is real partnership between the FDIC and investors in these deals, so you better be good at managing the assets.”
Homebuilder Lennar Corp. also bought into two limited liability companies holding loans seized from failed banks. The Miami-based builder paid $243 million for a 40 percent stake in two LLCs with $3.05 billion of unpaid loans, according to data compiled by Bloomberg.
Lennar’s cash contribution comes to about 19 cents per dollar of book value for its interest in one of the limited liability companies and about 23 cents for the other. In a February regulatory filing, Lennar valued the deals at about 40 cents on the dollar after taking into account $627 million in interest-free financing that went to the holding companies and the equity stake the FDIC is keeping.
Book value refers to the unpaid balance of the loans.
Lennar spokesman Marshall Ames declined to comment for this story.
Flats at Loft 5
The Starwood-led group including TPG and developer Richard LeFrak bought a 40 percent stake in the company holding Corus’s portfolio for 31 cents cash on the dollar as measured against its share of the book value of the assets. The FDIC covered half of the deal’s $2.77 billion purchase price with an interest-free loan.
Prospects for properties backing the FDIC assets are mixed, according to LeFrak, who visited a Corus property called the Flats at Loft 5 while in Las Vegas for his son’s wedding in October. About half of its 272 units are for rent, according to the leasing office. That’s because the condos didn’t sell, said LeFrak, whose holdings include 15,000 New York City apartments.
“It was kind of like in the middle of nowhere, and the design was kind of unusual and you went: ‘Why would anyone do this?’” he asked.
‘Dirt Cheap’
By contrast, LeFrak halted what he called “dirt cheap” sales at the Carlos Ott-designed Artech condominiums in Aventura, Florida, so that his group could raise prices. The Artech’s floor-to-ceiling windows overlook the Intracoastal Waterway, and buyers have access to boat slips, a beach club and a chartered yacht, according to marketing materials.
The FDIC pledged up to $1 billion in working capital and to complete construction on unfinished developments, Starwood said in an October statement.
“These are complex portfolios that face construction, litigation and performance issues,” said Colony Capital CEO Thomas Barrack, whose Santa Monica-based firm offered about 20 percent less than Starwood in the Corus bidding, people familiar with the sale said at the time. “They come with an enormous amount of risk, and bidders are betting to a degree on when the market corrects itself.”
Colony Redux
Colony returned to the FDIC auctions in January and won, paying 22 cents cash on the dollar for a 40 percent stake in a company holding $1.02 billion in unpaid commercial real estate loans. The FDIC retained a 60 percent interest and provided zero-coupon notes to finance the deal, Colony Financial Inc. said in a regulatory filing. Colony valued the purchase at 44 percent of the unpaid balance of the loans.
Colony’s Barrack, Starwood’s Sternlicht and Fort Worth, Texas-based TPG co-founders David Bonderman and James Coulter all have experience buying bank assets dating from the savings and loan crisis.
Barrack, Bonderman and Coulter worked for Texas billionaire Robert Bass before starting their own private-equity firms. Bass oversaw the purchase of American Savings & Loan in a government- assisted rescue in 1988, at the time one of the biggest S&L failures.
Representatives of Colony, TPG and Starwood Capital declined to comment about whether they are participating in pending auctions by the FDIC.
Reluctant Banks
Scheduled FDIC sales included a $610.5 million package of real estate debts assembled from 19 seized lenders, including IndyMac Bank, Silverton Bank and New Frontier Bank. Regulators are preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December.
Private buyers are taking a bigger role in FDIC disposals because banks are glutted with commercial property and reluctant to buy more, said Chip MacDonald, a partner with Jones Day in Atlanta who specializes in deals among banks.
U.S. banks had $119 billion of non-performing commercial real estate loans on their books as of the fourth quarter, according to Foresight Analytics, a bank and property research firm in Oakland, California. Defaults are expected to pile up through 2011, and lenders have written off only 30 percent of the bad commercial mortgages they’ll ultimately face, according to a March report from Moody’s Investors Service.
“They just don’t need more exposure to real estate,” MacDonald said.
The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals.
The government, which was faulted two decades ago for letting bank assets go at fire-sale prices, is planning to profit along with investors. Instead of selling the loans outright, the FDIC kept stakes of 50 percent or more in at least five loan portfolios sold since September. It’s also demanding as much as 70 percent of any gains.
“They are doing a much better job this time around,” said John Bovenzi, the FDIC’s chief operating officer until last year, who also helped unwind the S&L crisis. “They have learned a lot, and they aren’t making the same mistakes.”
Loan sales planned or completed in 2010 are on pace to reach at least $10 billion in book value by mid-year, matching the total for all of 2009. The FDIC arranged at least $860 million in interest-free financing this year to support deals, according to statements from the buyers. A new sale of FDIC- owned loans with a book value of $1.97 billion is scheduled for June, according to documents obtained today by Bloomberg News.
Failed Banks
The sales involve packages of loans acquired by the FDIC from 182 banks that failed since the start of 2009. The loans typically are tied to commercial real estate and residential development, and can include debt on which borrowers stopped making payments or property seized by the bank.
Terms entitle taxpayers to a share of any money that private investors squeeze from delinquent borrowers or any profit earned reselling the assets. The FDIC-backed debt has to be repaid before the private-equity firms can take any cash generated by the loans.
Financing doesn’t go directly to investors. Instead, the FDIC is creating limited liability companies that hold the loans being sold and receive the financing.
“It’s very hard to lose money on a transaction like that,” Sternlicht said on a Feb. 11 conference call with potential investors, according to a copy obtained by Bloomberg News. “That’s the kind of asymmetric risk profile you love in a deal.”
‘So Distressed’
Financing is made on a deal-by-deal basis and won’t necessarily continue, said agency spokesman Andrew Gray.
“The financing helps pricing,” FDIC Chairman Sheila Bair said in a March 19 interview. The packages include hundreds of loans where borrowers aren’t making payments. Some “may be so distressed that a healthy bank just does not want to deal with them,” Bair said.
Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has written more than a dozen papers on government bailout programs, said the FDIC’s zero-percent financing artificially inflates prices by as much as 20 percent and leaves the agency’s insurance fund vulnerable to losses.
The regulator may have to write down the value of its holdings if private-equity managers can’t recover as much from the loans as they expect, Wilson said. The agency could also lose money if its partners don’t make enough to repay the FDIC’s financing, he said.
“A better structure would not subsidize high levels of leverage, and it would eliminate the government’s stake entirely,” he said. That would also allow the agency to collect cash more quickly while reducing risk, according to Wilson.
Resolution Trust
Things have changed since Sternlicht, 49, oversaw a fund that bought assets from the Resolution Trust Corp., the government agency that sold loans and property of failed lenders in the 1990s. The RTC disposed of $394 billion of assets from 747 banks between 1989 and 1995, according to an FDIC review published in 2000. Back then, a fund Sternlicht managed earned about a 94 percent return on purchases including those from the RTC, he said in the February call.
This time when Starwood and its partners won a stake in a company holding $4.5 billion of unpaid loans, the FDIC added an “equity kicker.” It increases the agency’s stake to 70 percent from 60 percent once the Starwood-led group makes back twice its initial investment and earns a 25 percent internal rate of return, according to the regulator.
The loans Starwood will help oversee were once held by the failed Chicago lender Corus Bankshares Inc.
‘Real Partnership’
“Structured loan sales benefit both investors and the U.S. taxpayer,” Sternlicht said in a telephone interview. “There is real partnership between the FDIC and investors in these deals, so you better be good at managing the assets.”
Homebuilder Lennar Corp. also bought into two limited liability companies holding loans seized from failed banks. The Miami-based builder paid $243 million for a 40 percent stake in two LLCs with $3.05 billion of unpaid loans, according to data compiled by Bloomberg.
Lennar’s cash contribution comes to about 19 cents per dollar of book value for its interest in one of the limited liability companies and about 23 cents for the other. In a February regulatory filing, Lennar valued the deals at about 40 cents on the dollar after taking into account $627 million in interest-free financing that went to the holding companies and the equity stake the FDIC is keeping.
Book value refers to the unpaid balance of the loans.
Lennar spokesman Marshall Ames declined to comment for this story.
Flats at Loft 5
The Starwood-led group including TPG and developer Richard LeFrak bought a 40 percent stake in the company holding Corus’s portfolio for 31 cents cash on the dollar as measured against its share of the book value of the assets. The FDIC covered half of the deal’s $2.77 billion purchase price with an interest-free loan.
Prospects for properties backing the FDIC assets are mixed, according to LeFrak, who visited a Corus property called the Flats at Loft 5 while in Las Vegas for his son’s wedding in October. About half of its 272 units are for rent, according to the leasing office. That’s because the condos didn’t sell, said LeFrak, whose holdings include 15,000 New York City apartments.
“It was kind of like in the middle of nowhere, and the design was kind of unusual and you went: ‘Why would anyone do this?’” he asked.
‘Dirt Cheap’
By contrast, LeFrak halted what he called “dirt cheap” sales at the Carlos Ott-designed Artech condominiums in Aventura, Florida, so that his group could raise prices. The Artech’s floor-to-ceiling windows overlook the Intracoastal Waterway, and buyers have access to boat slips, a beach club and a chartered yacht, according to marketing materials.
The FDIC pledged up to $1 billion in working capital and to complete construction on unfinished developments, Starwood said in an October statement.
“These are complex portfolios that face construction, litigation and performance issues,” said Colony Capital CEO Thomas Barrack, whose Santa Monica-based firm offered about 20 percent less than Starwood in the Corus bidding, people familiar with the sale said at the time. “They come with an enormous amount of risk, and bidders are betting to a degree on when the market corrects itself.”
Colony Redux
Colony returned to the FDIC auctions in January and won, paying 22 cents cash on the dollar for a 40 percent stake in a company holding $1.02 billion in unpaid commercial real estate loans. The FDIC retained a 60 percent interest and provided zero-coupon notes to finance the deal, Colony Financial Inc. said in a regulatory filing. Colony valued the purchase at 44 percent of the unpaid balance of the loans.
Colony’s Barrack, Starwood’s Sternlicht and Fort Worth, Texas-based TPG co-founders David Bonderman and James Coulter all have experience buying bank assets dating from the savings and loan crisis.
Barrack, Bonderman and Coulter worked for Texas billionaire Robert Bass before starting their own private-equity firms. Bass oversaw the purchase of American Savings & Loan in a government- assisted rescue in 1988, at the time one of the biggest S&L failures.
Representatives of Colony, TPG and Starwood Capital declined to comment about whether they are participating in pending auctions by the FDIC.
Reluctant Banks
Scheduled FDIC sales included a $610.5 million package of real estate debts assembled from 19 seized lenders, including IndyMac Bank, Silverton Bank and New Frontier Bank. Regulators are preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December.
Private buyers are taking a bigger role in FDIC disposals because banks are glutted with commercial property and reluctant to buy more, said Chip MacDonald, a partner with Jones Day in Atlanta who specializes in deals among banks.
U.S. banks had $119 billion of non-performing commercial real estate loans on their books as of the fourth quarter, according to Foresight Analytics, a bank and property research firm in Oakland, California. Defaults are expected to pile up through 2011, and lenders have written off only 30 percent of the bad commercial mortgages they’ll ultimately face, according to a March report from Moody’s Investors Service.
“They just don’t need more exposure to real estate,” MacDonald said.
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