2014 Government Regulations & Business Summit
Join PBN and our sponsors for our Government Regulations & Business Summit on Th ...
By Richard Bravo
NEW YORK - Banks in the U.S. increased their lending to corporations by the most in almost three years last month, a sign of optimism as evidence mounts that the economic recovery is teetering.
Commercial and industrial loans climbed to $1.29 trillion for the week ended Aug. 24, bringing the gain for August to 1.49 percent, the biggest jump since October 2008, according to Federal Reserve data. Loans outstanding, which have climbed for seven straight weeks, the longest streak since March 2008, are up from this year’s low of $1.23 trillion on Jan. 26.
U.S. banks say they are easing lending standards as Wall Street firms forecast profits in the Standard & Poor’s 500 index will increase 19 percent for all of 2011 and 12 percent in 2012. Net income is growing even as economists surveyed by Bloomberg lower their growth estimates to 1.75 percent for this year, down from an average 2.9 percent in April.
“We’re seeing some growth in C&I loans and it’s consistent with some loosening of lending standards, but in absolute terms lending standards are still very tight,” said Dana Saporta, an economist at Credit Suisse Group AG in New York. “Of the limited lending that commercial banks do, C&I loans are performing the best, but their growth is still quite modest.”
While the Fed’s survey of senior loan officers indicated an easing of credit standards, the markets for leveraged-loans and speculative-grade bonds are better gauges of the direction of corporate borrowing, said John Lonski, chief economist at Moody’s Capital Markets Group in New York.
Relative yields on speculative-grade bonds and leveraged loans have climbed on concern that weaker borrowers will have a harder time repaying their debts in a slowing economy.
“The dramatic widening of high-yield bond and loan spreads has had the effect of tightening bank lending standards,” Lonski said. “I wouldn’t be surprised if that jump by C&I loans outstanding during August was largely driven by a drawdown of highly leveraged loan credit facilities as highly leveraged companies were denied access to the bond market.”
Elsewhere in credit markets, the extra yield investors demand to own company notes worldwide instead of similar- maturity government debt rose 3 basis points to 231 basis points, or 2.31 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.707 percent.
Lockheed Martin Corp. sold $2 billion of notes as investment-grade debt issuance showed signs of revival. Huntington National Bank is leading $3.55 billion of bond offerings backed by auto loans and the cost to protect U.S. and European company debentures jumped.
Bonds of Fairfield, Conn.-based General Electric Co. were the most actively traded fixed-income securities in the U.S. by dealers, with 114 transactions of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Lockheed Martin issued $500 million of 2.125 percent bonds due in 2016 that priced to yield 127 basis points more than similar-maturity U.S. Treasuries, according to data compiled by Bloomberg. The Bethesda, Md.-based company also raised $900 million of 3.35 percent, 10-year debt at a spread of 142 basis points and $600 million of 4.85 percent, 30-year securities that pay 167 basis points more than the benchmark.
The world’s largest defense contractor was joined in the bond market by Enbridge Energy Partners LP, which issued $750 million of debt maturing in 10 and 29 years, and Detroit Edison Co. which sold $140 million of bonds due in 2041, Bloomberg data show.
Bond sales for investment-grade companies in the U.S. may reach $80 billion this month, according to Bank of America Corp. strategists, after plunging to $50.5 billion in August, the least since May 2010. Issuance fell 30 percent to $3.98 billion last week, Bloomberg data show.
Huntington National’s $1 billion offering of securities backed by auto loans will be the Columbus, Ohio-based lender’s first asset-backed issue since March 2009, when the bank sold $963 million in bonds through a Fed program to jumpstart lending, Bloomberg data show.
AmeriCredit Financial Services, the auto lender purchased by General Motors Co. last year that makes loans to buyers with blemished credit, is marketing $800 million of asset-backed bonds, a person familiar with that sale said. Banco Santander SA is offering $750 million of debt backed by vehicle loans and Ally Bank is selling $1 billion of the notes.
Default Swaps Rise
The cost of protecting corporate bonds from default in the U.S. rose, with the Markit CDX North America Investment Grade Index climbing 5.4 basis points from Sept. 2 to a mid-price of 126.4 basis points, according to Markit Group Ltd.
The index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, reached 126.8 on Aug. 22, which was the highest since June 2010. U.S. markets were closed on Sept. 5 for Labor Day.
The cost of insuring European government and bank bonds fell from records. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 nations dropped 10 basis points to 320. The Markit iTraxx Financial Index of 25 banks and insurers was 11 lower at 262 basis points, according to JPMorgan Chase & Co. at 10 a.m. in London.
The indexes rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
The S&P/LSTA U.S. Leveraged Loan 100 index fell for the first time in six days. The measure decreased 0.6 cent to 88.97 cents on the dollar. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has declined from this year’s high of 96.48 cents on Feb. 14 and reached 87.47 cents on Aug. 26, the lowest since December 2009.
High-yield bonds and leveraged loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
In emerging markets, relative yields rose 1 basis point to 377 basis points, or 3.77 percentage points, according to JPMorgan’s EMBI Global index. The index has ranged this year from 259 on Jan. 5 to 387 on Aug. 9.
Banks loosened credit standards in the second quarter as competition grew among lenders, according to the Fed’s quarterly survey of senior loan officers, released Aug. 15. The Fed survey of loan officers at 55 domestic banks and 22 U.S. branches and agencies of foreign banks was conducted from July 12 through July 26, the Fed said. The report doesn’t identify respondents.
“Credit availability from banks has improved, though it remains tight in categories -- such as small business lending -- in which the balance sheets of potential borrowers remain impaired,” Fed Chairman Ben S. Bernanke said Aug. 26 at the Kansas City Fed’s economic symposium in Jackson Hole, Wyo. “Companies with access to the public bond markets have had no difficulty obtaining credit on favorable terms.”
While the amount of commercial and industrial loans outstanding has been rising, it’s still shy of the $1.61 trillion in October 2008, when the total grew by 3.06 percent from the previous month, Fed data show.
S&P 500 companies exceeded analyst projections for 10 straight quarters, including the 17 percent rise in earnings during the three months ended in June.
The economy expanded at a 1 percent pace in the second quarter following a 0.4 percent gain in the first three months of the year, the Commerce Department reported last month. Consumer spending grew 0.4 percent, the smallest increase since the last three months of 2009.
The Federal Open Market Committee pledged in its Aug. 9 statement to keep its key interest rate at a record low at least through mid-2013 in an attempt to boost the economic recovery. The benchmark interest rate has been at zero to 0.25 percent since December 2008.
“In general, if you want to talk about bright spots in this economic recovery it has been corporate earnings,” said Credit Suisse’s Saporta. “As a percentage of their total assets companies have more cash-type instruments than they’ve had since the mid-1960s. All they really lack right now is the confidence to go and hire people because they can’t be sure that the demand is there for their products.”
Access to funds through the junk-bond and leveraged-loan markets dried up last month in the midst of the weakening economy. The issuance of high-yield bonds fell in August to $987 million, the least since December 2008, Bloomberg data show.
Companies raised $3.02 billion in speculative-grade loans last month in the U.S., down from $27.6 billion in July and this year’s peak of $69.5 billion in February, according to S&P Leveraged Commentary & Data. Issuance was the least since falling to $1.27 billion in December 2008, two months after Lehman Brothers Holdings Inc. collapsed.
Relative yields on junk bonds have climbed to 754 basis points as of Sept. 6 from 558 at the end of July, Bank of America Merrill Lynch index data show. The spread on first-lien institutional term loans for all speculative-grade corporate ratings rose to 5.24 percentage points on Aug. 25, the highest level since July 2010, according to S&P LCD. The average spread was at a record low of 2.43 percent in March 2007.
“If you look back at the Fed survey, C&I was the only place they saw expansion,” said Michael Hanson, senior economist at Bank of America Corp. “It was large banks lending to large firms. It’s not a surprise that the healthiest sector of the economy is attracting the lending.”
Commercial and industrial loans outstanding increased about $20 billion last month, Bloomberg data show. Banks have excess reserves of about $1.6 trillion, Saporta said, indicating that the bulk of the excess liquidity in the banking system is still not being lent out.
“The C&I data is definitely encouraging,” Mariarosa Verde, a managing director at Fitch Ratings, said in an e-mail. “Despite market volatility companies are focusing on growth and investment. The fear of course is that this progress loses momentum in the face of the European debt crisis and other concerns.”