WSJ says banks are finally pulling in credit horns

I guess we aren’t quite yet seeing the final chapter to the credit crunch story. At least not today.

As you’ve read here repeatedly in the past (see posts “Moodys worried about slide in lending standards“, April 12-07, “Quote of the day“, June 21-07, “Bear Stears catches subprime cough, Australian corporate bonds get a cold“, June 26-07, “LBO debt spreads widen, PE deals looking rocky” June 29-07, “The end of cheap debt has arrived” July 20-07), it was only a matter of time before the chartered banks needed to get their arms around their own corporate and commercial loan books. It appears that the chickens are now coming home to roost. Even if the horse is out of the barn (to intentionally throw dueling clichés at you).

Here are some excerpts from a wonderfully detailed piece from the WSJ online that pretty much sums up what you’ve seen developing over the past several months.

“Banks Clamp Down On Corporate Credit
By DAVID ENRICH
August 1, 2007

Big banks facing the prospect of taking on billions of dollars in buyout-related debt this fall are starting to clamp down on lending to companies that need to refinance loans or restructure their balance sheets.

The tight-fisted approach shows how banks’ willingness to back leveraged buyouts during the frenzied deal-making of the first half of the year could hurt companies with more ordinary funding needs now that efforts to finance those deals are running into trouble.

As banks rein in riskier lending, companies could find themselves starved of capital to refinance loans that are coming due or to overhaul their businesses. The result, experts say, is that some struggling companies may be forced to seek bankruptcy protection — a development that would exacerbate bond-market turbulence and could ripple through the broader economy.

In recent weeks, negotiations with banks over refinancings have gone “from a cordial conversation to something very aggressive,” said Al Koch, vice chairman of AlixPartners, a firm that advises companies that need to restructure. “Our sense is with the credit markets where they are today, there’s not enough money to go around. Companies that either need more money or may need a refinancing may find out that the window is either not open or it’s only partially open.”

Some companies that are deemed riskier borrowers, Mr. Koch added, “won’t make the cut, and they’ll have no alternative but to file for bankruptcy.”

About $680 billion in leveraged loans are set to mature by 2011, with more than $150 billion of junk-rated loans coming due in 2008 alone, according to a recent study by Fitch Ratings. The telecommunications and utilities industries have the most significant amounts of loans coming due.

Companies in the beleaguered homebuilding industry may come under pressure as they try to refinance loans. Last week, Beazer Homes USA Inc. got a new $500 million credit line to replace one that was twice as large. Joseph A. Snider, a senior analyst at Moody’s Investor Service, said that as homebuilders write down the value of their assets amid declining home prices, banks are likely to get tougher about granting new credit — a situation exacerbated by the skittish credit markets.

“The banks had this ongoing love affair with homebuilders, and obviously that’s going to change,” Mr. Snider said.

The banks’ newfound caution stems in part from their potential exposure to buyout-related debt that they might not be able to sell. As much as $300 billion in debt to fund buyouts has yet to hit the market.

Investors already have refused to buy bonds and loans supporting some recent deals, leaving the banks holding the bag for debt they agreed to underwrite. In the most prominent example so far, banks including Citigroup Inc. and J. P. Morgan Chase & Co. were expected to have to fund from their own pockets the bulk of a stalled $12 billion debt issue meant to finance Cerberus Capital Management’s pending buyout of Chrysler Group.

Hoping to avoid getting stuck in similar situations, bankers in recent weeks have been talking with private equity firms about restructuring bond offerings in order to make them palatable for investors.

But the buyout shops have little incentive to accept financing arrangements that are less attractive than what banks already have agreed to provide, experts say. And banks are unlikely to simply walk away from their commitments, especially in deals involving prized clients like major private equity firms.

“That would finish them in the business,” said Robert J. Graves, co-head of the banking practice at law firm Jones Day. “If you’re going to pinch anybody, you don’t pinch your best customers.”

For now, banks instead are looking lower down the food chain. They are trying to tweak terms of smaller deals sponsored by mid-tier private equity firms, boosting interest rates and trying to add restrictive terms. They also are getting tougher on loan refinancings and balance-sheet restructurings, which Mr. Graves said are “easier targets.” He said several of his clients recently have had to delay planned refinancings.

In some cases, the banks are revisiting plans that they’d already agreed to finance. They’re also insisting that private equity firms that sponsor refinancings inject more of their own cash into the deals.”

I’d like to get a chance to quiz the senior analyst at Nomura Securities who had this to say to the New York Times on June 21st (see post “Quote of the day” June 21-07):

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets [bolding added] so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”

I didn’t agree with the Nomura analyst:

“If you are trying to piece together what the subprime meltdown might mean for the institutions that, in essence, finance the CDOs and CLOs that soak up all of that corporate debt issued on private equity deals — and how that might eventually lead to tougher credit for your firm — the NYT piece is worth a read.

If the CDOs lose their appetite for corporate paper, and the banks are currently selling 80% of each deal to the CDOs (and the rest of the corporate paper market), who will hold that 80% if the banks don’t? Does the tap turn off for PE land?”

Apparently the tap just got turned off, according to The Wall Street Journal. At least for the 2,500 mid market private equity firms chasing deals in the U.S.A. and abroad.

What business school did the guy at Nomura attend that taught him the credit markets were discrete, bomb proof silos? There’s a reason that each professional lending institution has but one senior risk officer: they are mandated to have their eyes on all of the slices of the institution’s credit pie.

It is called a loan book, and when the senior risk officer goes to bed each night, that “loan book” is carefully put under his/her pillow until the next day. Books have pages, and chapters, and highlights. But the risk manager wants it to be a boring book, so that he/she can actually put it down each night. If it’s just too darn exciting, then our risk manager can’t bring him/herself to put the book down. Thus, no sleep.

I asked this rhetorical question in an April 12th post…:

How long before the senior risk managers at the commercial banks decide that they need to tighten their own credit books just a titch?

…and we now have our answer. It took about 10 weeks.

As the losses to Latin America (Brazil and Mexico), or the Oil and Gas industry (Dome), or the real estate industry (Olympia & York) hit the front pages — impacting the sleep patterns of the risk managers — normal commercial and credit clients would ask of their banker in the 70s and 80s and 90s: what’s that all got to do with me?

The answer is always the same, decade after decade: Nothing, yet everything.

MRM