Today’s debt markets are positively skewed in favor of the borrower more than at any time in recent history. This opportunity is due to central banks keeping interest rates at historic lows, capital flows coming out of Europe seeking safety and return, U.S. commercial banks and alternative lenders competing for loans, and an improving economic outlook in the United States. Companies should be actively considering how debt fits into their current capital structure and future plans for growth.
Alternatives getting traction
Coming out of the financial crisis in 2010 and into 2011, banks were slow to lend to any company other than the most creditworthy. This disposition opened the door for alternative lenders who were quicker to respond to an improving economic environment. Over the course of the last year, the trend shows commercial banks loosening their constraints on lending as they are now tasked with bringing in more clients and providing more credit availability.
Large corporate issuers are responding
The issuance of U.S. corporate debt exceeded $1.36 trillion in 2012, a 34 percent increase from 2011, and 21 percent higher than any year in the last 20 years.
Fixed-income products are in high demand by the largest national investors like China, pension funds and individual investors. In fact, one can argue that they invest at an effective loss. With current rates below inflation, investors are showing their preference for yield, accepting a notional loss with Treasury Department yields trading below the implied consumer price index.
Other debt instruments have experienced similar trends
The demand for yield-bearing instruments, combined with an improving economic environment, has caused lenders to ease credit to provide the supply to meet the market’s demands. Companies of all sizes now have improved access to debt financing with attractive pricing, availability and terms.
As an example, high-yield bonds (those with credit ratings of CCC- and below) have a historical average loss rate of 4.3 percent over the past 17 years. Today, the high-yield index is trading between 5 and 6 percent, only 0.7 to 1.7 percent above its traditional loss rates.
That net spread does not primarily reflect a lower risk profile for these companies, nor is it tied to the underlying strength of the economy, as much as it represents the demand in the marketplace and an undersupply of interest bearing products.
This lack of supply has driven down pricing, improved terms and provided greater availability, well below the risk-adjusted pricing and implied spread over the past 17 years.
What does it all mean?
Today’s combination of historically low interest rates, favorable lending terms and high borrowing availability may not continue beyond the next year or so. The Federal Reserve has committed to keep rates low through 2014, but not much beyond that.
Many economists are beginning to voice concern about the long-term implications of keeping rates low. For businesses that have good reason to deploy debt to grow their companies, reduce their personal risk by executing a dividend recapitalization or sell their business, this is a good time to take the steps necessary to secure a successful outcome. Lenders are making it easier than ever to borrow money as long as it is done wisely — now is the time.
Joel Magerman is the managing partner and CEO of Bryant Park Capital. During the course of his career, he has been involved in closing more than 75 transactions as both a principal and an investment banker. For more information, visit www.bryantparkcapital.com.
