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Tuesday June 3, 2008
Topic: Tight Credit Returns
Reference: Teitelbaum, Henry. “Basel Faulty”. Institutional Investor. April, 2008, pp.64-68.
It seems like just yesterday that easy credit and loose loan standards ruled the day. No more. The market has completely flipped and the credit standards are much tougher, more stringent, and subject to excessive review. On the housing side, previously high credit scores are now seen as barely meeting the quality standards. In commercial lending, the same state of play exists. Institutional lenders have a lot less money to lend; the call for more regulation is in the air, and the pricing of deals has gotten very tight. For private companies without access to the public markets, this means that credit terms are likely to be tougher for the foreseeable future.
Tuesday June 3, 2008
 Topic: Tight Credit Returns
Reference: Teitelbaum, Henry. “Basel Faulty”. Institutional Investor. April, 2008, pp.64-68.
It seems like just yesterday that easy credit and loose loan standards ruled the day. No more. The market has completely flipped and the credit standards are much tougher, more stringent, and subject to excessive review. On the housing side, previously high credit scores are now seen as barely meeting the quality standards. In commercial lending, the same state of play exists. Institutional lenders have a lot less money to lend; the call for more regulation is in the air, and the pricing of deals has gotten very tight. For private companies without access to the public markets, this means that credit terms are likely to be tougher for the foreseeable future. It will be harder to get money when you need it, and even if you can qualify you can expect higher rates and tougher underwriting standards. In the referenced article the commentator delves into the potential root cause of the credit problem and has identified asset model problems as a key culprit. “When everyone is using similar risk-sensitive models, they end up owning similar stuff and end up being forced to sell at the same time…Liquidity is driven by diversity of behavior. Basel II (an international credit standard accord adopted in 2004) takes naturally heterogeneous market participants-a range of market participants of very different investment strategies-and it makes them very homogenous.” The net effect is that when the models are adjusted, the capital requirements increase for off balance sheet and special investment vehicles, restricting capital for lending. To me this means that the time is now to improve your cashflow by pulling in receivables, and extending payables to reasonable levels. It also may mean that it is time to sell non-critical assets to raise cash for core operations. Finally, it is definitely time to make the rounds with financial advisors and bankers to build rapport and support for your operations. Something tells me that we are going to need it in the near future. Let me know your thoughts on how you plan to address the new era of tight credit.
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