Credit markets have existed in humanity since the beginning of time. Like the ongoing debate over the contested arrival of the chicken or the egg (I feel pretty strongly that it was the egg), which came first: The lender or the borrower? I’m less sure about this one but I suspect it was driven by an opportunistic farmer in ancient Mesopotamia who needed capital to expand his acreage or simply bridge the seasonality of his crop cycle. This discussion is relevant today because there is a general assumption that lenders aren’t currently lending money and if they are, the pricing and terms are not in the comfort zone of most borrowers. And without the injection of fresh debt capital into the markets and economy, it is unlikely that we will see a boost in the capital markets or economic activity.
When I speak to many of the lenders that we know, they tell me that they are very busy. “Doing what?” I ask. “Lending money?” They typically answer “Well, yes and no.” Much of what they are doing is rewriting their existing deals, refinancing the deals of other lenders, or, if they are putting out new money, it is to companies that fall on the larger end of the middle market spectrum. When asked directly about this lack of new money, they tell me that client demand is not there. In other words, borrowers are not borrowing.
When I speak to CFOs and the owners of privately held companies (either individuals or private equity groups) they seem resigned to the fact that credit (reasonably priced or not) is not available to them for expansion or acquisition. As a result, these initiatives have been put on hold (“why waste our time if we can’t get the financing”).
Stable and sustainable credit markets result from finding that equilibrium point between the Supply and Demand curves for credit. Regardless of the commodity in question, abundant supply will always (eventually) get soaked up by the market and increased demand will always (eventually) be met by existing providers or new entrants.
Whenever supply outpaces demand in the credit markets (such as when lenders thrust inexpensive, unwanted credit upon the market), we end up in a situation where borrowers have an abundance of credit at below market terms. History has proven that this credit dynamic always (eventually) leads to a bursting bubble with observers wondering how such an awful thing could happen (again). The healthier alternative for the market is for borrowers of the world to unite, rise up and revisit those growth plans or acquisitions. This action will create the loan demand that, in a truly competitive and capitalist system, will drive lenders forward to meet that demand on reasonable price and terms, raising the equilibrium point to a healthier and more sustainable level than it is today.
Michael Papile is a Managing Director at Covington Associates. He can be reached at 617-314-3950 or ibankerblog@covllc.com.
