Business Finance:: Lending and Job Creation in The 21 Century
Business Finance:: Lending and Job Creation in The 21 Century
Business Finance:: Lending and Job Creation in The 21 Century
Fall 2010
Industrial and commercial loans by
all depository institutions declined in 2009
Quarterly change, US$ billions
120
80
40
-40
-80
-120
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Source: FDIC.
2
Bank lending continues to decline, while
businesses and individuals draw upon
existing credit lines
US$ trillions
9.0
Unused commitments
8.0
7.0
5.0
4.0
2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Sources: FDIC, Milken Institute.
3
Companies raised $3 trillion worldwide in
2009 via corporate bond issuance
US$ billions
3,500
2009: $3 trillion
3,000
2,500
2,000
1,500
1,000
500
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: Dealogic.
4
U.S. companies raised $883 billion from
corporate bond issuance in 2009
US$ billions 2009: $883 billion
1,000
Thousands
900
800
700
600
500
400
300
200
100
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: Dealogic.
5
Companies worldwide raised $809 billion on
equity markets in 2009
US$ billions
900
800
IPO
700
600
500
400
300 Follow-on
200 offering
100
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Dealogic.
6
Loan issuance in the United States
Quarterly, Q1 2004 to Q1 2010
US$ billions
900
Investment grade
800
700 Leveraged
600 Highly leveraged
500
400
300
200
100
0
2004 2005 2006 2007 2008 2009 2010
Source: Dealogic.
7
$625 billion high yield bonds and $1.9 trillion
leveraged loans are scheduled to mature by 2015
US$ billions
600 Leveraged loans
400
300
200
100
0
2010 2011 2012 2013 2014 2015 >2015
Source: Dealogic.
8
Leveraged loans scheduled to mature
between now and 2015
US$ billions
600
Others
500
Term loan
400 Revolving credit
300
200
100
0
2010 2011 2012 2013 2014 2015 >2015
Source: Dealogic.
9
Traditional vs. shadow banking system
Loans CD, CP,
Borrowers Traditional banks bank equity
Cash Products
-Corporate
Investors
borrowers Shadow banking system Commercial
paper (CP)
- Individual
- Bank conduits •Money market funds
borrowers Medium term
- Special investment vehicles note (MTN)
•Securities lenders
(SIVs) and limited purpose CP, MTN
finance companies (LPFCs) and capital
•Investment managers
- Securitizations (ABS, RMBS, Capital
•Under-exposed banks
CMBS, auto loans)
Capital,
- CLOs, CBOs and CDOs Debt •Pension companies and
insurance companies
- Special credit managers
Source: Gary Gorton (2010).
10
Despite market value Haircuts, CLO event of
default levels at their trough maintained 15%+
cushion levels
U.S. Corporate CLO EOD Index
2003 CLOs - Senior O/C ratio 2004 CLOs - Senior O/C ratio 2005 CLOs - Senior O/C ratio
2006 CLOs - Senior O/C ratio 2007 CLOs - Senior O/C ratio 2003 CLOs - EOD O/C trigger
2004 CLOs - EOD O/C trigger 2005 CLOs - EOD O/C trigger 2006 CLOs - EOD O/C trigger
2007 CLOs - EOD O/C trigger
135
130
125
120
115
(%)
110
105
100
95
90
Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09
Economic
growth
Securitization
Consumption
Cheap
financing
12
Total private credit market debt/US GDP
1916 to 2009
Percent
350
Great Depression
300
Today
250
200
150
100
50
0
1920 1930 1940 1950 1960 1970 1980 1990 2000
Sources: Federal Reserve, Historical Statistics of the United States, Bureau of Labor Statistics, Milken Institute.
13
Leveraged loan and high yield spread
Q1 1998 to Q4 2009
Basis points
2,000
400
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
14
A liquidity crisis
Leveraged loan market: Subprime:
Minimal capital available to Defaults & losses lead
loan market from Hedge to uncertainty & loss
Funds, CLOs, Banks of confidence
SIVs & Conduits:
Hedge funds: Loss of confidence results in
Liquidity
Marked-to-market losses, disappearance of short term
conditions to equity Crisis
funding/ABCP market forcing
withdrawals and liquidations some SIVs holding LT portfolios
into default and liquidations
CLOs: Banks:
Bank warehousing Illiquidity and disappearance of lenders
lines frozen, AAA lender leads to overhang of loans on bank books
disappears, closes ABS causing markdowns and secondary price
market decline 15
U.S. leveraged loans outstanding
2000 to 2009
US$ billions
1800
1600
1400 Non-syndicated loans
1200 Syndicated loans
1000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
16
Active institutional loan investor groups
1996 to 2009
Number of investor groups that made 10 or more primary commitments each year
300
261
250
218
200
168
150
116
98 102
100 76 85
54 64
48 42
50 29
22
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Sources: Credit Suisse Leveraged Loan Index, S&P LCD Quarterly Leveraging Lending Review.
17
Syndicated bank loan and high yield bonds
maturing in the next five years
US$ billions
450 $403
400
350 $308 $108
300
250 $93
200 $156
$126
150 $294
$61
100 $68 $215
$43
50 $22 $95
$21 $58
0
2010 2011 2012 2013 2014
Sources: Credit Suisse Leveraged Loan Index, Merrill Lynch High Yield Master II Index, S&P LCD Quarterly Leveraging Lending Review.
18
Middle-market loans maturing in the next
five years
US$ billions
160
140 Sponsored Non-sponsored
140
120 31
99 103
100
17
80 38
8
60 52
109
40 71 82 26
65
20
25
0
2010 2011 2012 2013 2014
19
Differentiating CLO’s versus Mortgage CDO’s
20
Corporate loan default rates peaked in 2009
at less than half the current mortgage
delinquency rate
Percent
30%
3/31/10:
25% Mortgage delinquency rate (2) 25.68%
20%
15%
Loans default rate 3/31/10:
10% (by issuer) (1) 10.26%
5%
0%
2005 2006 2007 2008 2009 2010
22
CLO outstanding reinvestment period
US$ billions
300
Cumulative CLO outstandings
in reinvestment period
200
Cumulative decrease in demand
as reinvestment period ends
100
-100
-200
-300
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
23
U.S. middle-market loan issuance
2001 to 2009
Total issuance, US$ billions Large and traditional loan issuance, US$ billions
200 160
180 140 Large
160 Traditional
120
140
120 100
100 80
80 60
60
40
40
20 20
0 0
2001 2003 2005 2007 2009 2001 2003 2005 2007 2009
24
Importance of BDCs to the middle market
25
Prognosis for BDCs—Outlook improving
26
Cost of capital for BDCs is normalizing
Yield to maturity, percent
45
40
Bank of America/Merrill Lynch
35 U.S. high yield B-BB index
30
25
20
15
10
5 BDC dividend yields
0
3/30/2005 3/30/2006 3/30/2007 3/30/2008 3/30/2009 3/30/2010
27
Bank failures reached 140 in 2009
Annual: 1934 — 2009
Source: FDIC.
*through March 19, 2010
28
Number of “problem institutions” reached
702 in 2009, exceeding $400 billion in assets
Annual: 2001 — 2009
Source: FDIC.
29
FAS 157—Unintended consequences
• FAS 157 was enacted in 2006 (for adoption after November 15, 2007) to
address uniformity in accounting standards for fair value measurements
• While BDCs were created to supplement a bank function, they were not
granted the same accounting standards for loans ascribed to banks
• While BDCs have always been required to fair value their assets, FAS 157 and
subsequent regulatory guidance changed fair value measurement for assets
but did not permit them to fair value their existing liabilities in a similar manner
• Unintended consequence: During the credit crisis, the FAS 157 process forced
money-good assets to be marked down, skewing statutory leverage ratios and
thus diminishing the ability of BDCs to extend capital during a critical period