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“2010 Credit Market: Will the Credit Squeeze Continue?”: Recap Summary of TMA Webinar

November 17, 2009


At lunch today, my colleagues and I listened to the TMA’s Webinar entitled “2010 Credit Market: Will the Credit Squeeze Continue?” I thought I would take few moments to recap here, in what I call “plain-english”, some of what I learned.

As an FYI, The Turnaround Management Association (“TMA”) ( is the only international non-profit association dedicated to corporate renewal and turnaround management.  I am an active member of the Pittsburgh chapter and serve as its Treasurer.

I am also a Certified Turnaround Professional-D, a certification program facilitated by the TMA that creates an objective measure of the experience, knowledge, and integrity that is necessary to conduct corporate renewal work.  I believe I am one of only 6 CTP’s in the city of Pittsburgh and the only CTP in Pittsburgh who is also a lawyer.  I have a “D” after my designation, indicating that I am still in the process of completing the experience component of the designation.

I am a big fan of webinars in general, particularly the TMA’s webinars.  They are usually every month or so.  See Webinar Archive.  The webinars are always enlightening, and often, if not always, are at lunch (convenient time).  The discussions usually reference larger deals, though, and my firm The Meridian Group ( is usually engaged in smaller transactions involving middle-market companies ($10 million to $150 million revenue).

The panelists today were:

  • Arnie Dratt, Hilco
  • Gary Holtzer, Weil Gotshal, & Manges, LLP
  • Jason Perri, Apollo Capital Management
  • Robert Podorefsky, GE Capital
  • David Resnick, Rothschild, Inc.
  • David Gozdecki, GE Capital


1.  Who or what impacts interest rates and sources of capital?

ANSWER: The Federal Reserve.  (for non-finance types, you may be wondering, what is the Federal Reserve, anyway?  The Federal Reserve is an independent central bank accountable to Congress with the power to coin money and sell its value.  It uses 3 tools to tighten or expand the money supply: i) facilitating the buying and selling of U.S. government securities; (ii) altering the amount of funds that commercial banks must hold in reserve against deposits; and (iii) adjusting the  discount rate or interest rate charged to commercial banks.  See also  In this recession, it is the goal of the Federal Reserve to “reestablish a sustainable positive feedback loop between the financials markets and the economy.”  But, what influences the Federal Reserve? 

ANSWER: The labor markets.  Although the U.S. unemployment rate surged to 10.2%  in October, 2009, reaching double digits for the first time in 26 years, the job loss trend shows continued improvement from June, 2009.

ANSWER: The level of market anxiety.  Anxiety has been easing, as measured by the S&P 500 Volatility Index which displayed peak anxiety in October/November 2008 and a gradual waning of such anxiety, returning to almost normal levels reached from July 2007 to September 2008.

Bond spreads. Bond spreads (yields on different bonds with similar maturity dates) have been narrowing, as indicated by BB Composite bond spreads (10-year maturity in basis points) hitting a peak high in January 2009, and now returning to June, 2008 levels.

ANSWER:  LIBOR (the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans).  LIBOR has adjusted significantly  downward, hitting a peak on October 10, 2008, around 4.5% to about .25% in November, 2009 for both the 1-month and 3- month LIBOR.

ANSWER:  Lending Standards.   Tight lending standards have begun to ease, as evidenced by the declining percentage of banks that tightened standards for commercial & industrial loans and the declining percentage of banks that increased loan spreads.

ANSWER: Home Sales/Starts.  U.S. existing home sales are still low but are stabilizing and returning to levels reported in September of 2007.

U.S. business inventory turnover.  Inventory turnovers are adjusting downwards again as measured by inventory to sales ratios.  The inventory/sales ratio is a measure of how long it would take to deplete inventories at the current sales pace (in months).   As of September, 2009, the ratio was 1.32 months down from about 1.45 months reported at the beginning of the 2009 year.  The lower the number, of course, the better.

Gross Domestic Product (GDP) (for non-finance types, GDP is an  inflation-adjusted measure that reflects the value of all goods and services produced in a given year).  GDP is expected to continue to rise.  As of the 3Q of 2009, real GDP grew at a rate of 3.5% (that is, from the second quarter to the third quarter).

2.  So we know that with the credit freeze, the issuance of capital has been restricted.  How will borrowers handle the impending “maturity bubble” though and what does all of this mean in terms of restructuring strategies?

The panelists informed that there will be a “maturity wall” or “bubble” re: borrowing facilities.  Many of the institutional loans issued prior to the current recession will mature in 2012, 2013, and 2014.  Borrowers now are beginning to address these maturities via extensions and paydowns.   How are they making the paydowns?  Where will borrowers obtain capital for new transactions?

•    More bonds are being issued to refinance bank debt.  Bond spreads have tightened as appetite for credit has increased, in turn, generating a flurry of new issuance activity.

•    More deleveraged IPO’s are taking place (for my non-finance colleagues, an IPO, or initial public offering, is when a privately-owned company issues shares of stock to be sold to the general public for the very first time).  These shares are being sold at diluted values but nonetheless, the sales are raising capital for the company to pay off existing debt, hence the term “deleveraged.” 

•    Mezzanine loans are increasing.  Mezzanine capital is a subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares.  A more expensive financing source, mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.  Compression in the credit markets  has decreased the availability of junior debt capital, but thereby uniquely positioning mezzanine loans to benefit from lower high yield and second lien volumes.

•    More borrowers will need covenant relief.  Since financial covenants were set in a much more robust environment, companies are expected to need relief from such covenants.  This may provide lenders an opportunity to re-price loans, thereby increasing returns.

•    There has been a significant rise in pre-packaged bankruptcies.  (for the non-lawyer types, a pre-packaged bankruptcy is a plan for financial reorganization that a company prepares in cooperation with its creditors that will take effect once the company enters bankruptcy.  This plan must be voted on by shareholders before the company files its petition for bankruptcy, and can result in shorter turnaround times.).  See related article

Although 2009 was a peak year for defaults on high-yield bonds as well as commercial and industrial loans given overleveraged companies and the macroeconomic recession, the pace of defaults, however, continues to decline, global economic data shows improvements and, according to our panel, there is “growing optimism for a reasonably strong economic recovery.”  YEAH!!!!

I look forward to watching what happens to retail during this upcoming holiday season.  I will keep a close watch and report back here.  With coupons and Starbucks gingerbread lattes in hand, my sister is dragging my mother and me out on Black Friday!!!

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