Tighter Lending Standards Challenge Corporate Finance

by Erin McCune on March 17, 2008

in Investment Strategy

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The March issue of CFO magazine is focused on banking, or more pointedly, how companies are paying the price for the subprime crisis. There is an article on how poor risk management at banks contributed to the crisis, but more interesting was a thorough exploration of the impact on corporate lending:

Credit Crunch

As banks regroup, they are increasingly cautious about lending to businesses, even to those companies with outstanding credit. The market upheaval has limited banks ability to sell corporate debt in the secondary market, regardless of the quality of the underlying assets.

According to the Federal Reserve's senior loan officer survey:

  • One-third of banks tightened credit standards for mid-size and large businesses in 4th Quarter 2007;
  • Two fifths increased loan spreads over their cost of funds;
  • Not one of 56 banks surveyed eased standards.

This is a dramatic change versus the relatively easy financing available over the last few years (chart below), during which corporate finance teams could be relatively complacent, confident that their bank would loan funds for capital investment, M&A, and shorter term working capital.

Cfo_magazine_tigher_leading_march_2
Graph: CFO Magazine, March 2008; data source: Federal Reserve

The growing consensus is that this will be a long downturn, and with the banks at the center of the crisis, it may be many years before credit standards loosen again. Corporates will need to develop well honed back offices in order to tightly manage their working capital in the interim.

Why companies will need to work harder for credit.
Karen M. Kroll
CFO Magazine
March 1, 2008

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