What’s There When You Don’t Need It, Not When You Do?

11/3/09

It’s no news that there’s not much business credit available. Big banks got so burned, with some of them now wards of the state, that many have simply and subtly gone out of the business of writing senior debt. When their hapless clients hit extension or renewal time, they find themselves on the street scrambling for a lender.

In other cases, some banks have simply determined that entire industry sectors are off-limits. And other banks are jealously guarding their capital in the face of potential new losses in commercial real estate. Those banks still actively lending are demanding and getting much stiffer rates and covenants.

The recent bankruptcy declaration of CIT may indeed conclude with a relatively speedy and gentle exit from Chapter 11, but it still means a hole in the market where a major lender used to be.

All this rupturing of old, established banking relationships will get worse. Economists see trillions of dollars in debt maturing in the next several years. So who’s going to replace it, and what does this mean to the mid-market company owner?

While placing debt may have become nearly as complicated and time-consuming as raising equity, it can still be done with advance planning and creativity. Rather than giant “too big to fail” commercial banks, today’s sources of supply are a myriad of specialists, non-banks and community or regional banks. Examples of specialists are asset-based lenders of various stripes (inventory, capital equipment, accounts receivable, etc.). One type of non-bank is the mezzanine player who looks toward an equity position of some sort for an upside. Healthy community or regional commercial banks are also stepping onto the gap since they can better manage risk than their oversized brethren by understanding and closely tracking the nearby debtor’s business.

So solutions exist, albeit with more effort and expense than in most people’s memory. Be prepared for this new reality, but also know that today’s credit is likelier to be cheaper and more available than in the few years ahead.