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West Michigan Credit Market Update
On February 16, the West Michigan subchapter of the Detroit TMA held a panel discussion to update members and guests on the status of the West Michigan credit market.
On hand were representatives of the following four credit market sectors:
Large Banks – John Porterfield – Regional President – Comerica Bank
Mid-Sized Banks – Steve Potter – Senior Vice President of Commercial Lending – Independent Bank
Private Equity – John Pollock – Managing Director – LV2 Equity Partners
Asset Based Lending – Jeff Wright – Senior Vice President – Hitachi Business Finance
Some comments by the panelists:
• Most panelists felt that the current credit market was extremely competitive and strong borrowers could take their pick among many potential banks. For the marginal borrower, credit would be available, but at higher margins and with tighter terms and conditions. SBA Loans were frequently used in order to close deals.
• In general, credit terms were deemed “loose” as compared to the extremely tight credit witnessed during and following the 2008-9 Great Recession.
• Credit availability for business M&A activity was driving up multiples beyond traditional (rule of thumb) 5x-6x EBITDA to startling heights (13x EBITDA was mentioned).
• All panelists thought that interest rates would eventually rise (+50bp), as they have been predicted to over the past several years, but probably would not increase significantly for the next 12-18 months. Continuing under-employment/unemployment will encourage the Fed to keep rates low (barring a significant increase in inflation). Even with a modest increase, interest rates will still remain significantly below historical averages.
• The prevalence of SWAP’s has waned due to borrower resistance to them. In terms of interest rates in the foreseeable future, most borrowers believe rates will continue to remain at historic lows. A SWAP arrangement is not perceived to be advantageous by borrowers. However, interest rates most likely will rise in the future making this a great time to consider a SWAP.
• Most bank workout staffs have been slow for several months due to a lack of new, failing loans or the bank’s desire to keep them in-house rather than replace them with new deals. However, that practice may be changing. One large bank in the West Michigan market has changed their procedures to more quickly identify and remove underperforming loans and place them in workout more quickly.
• Currently, banks are looking at any industry or borrower to make a loan – there are no business types being excluded. While West Michigan continues to have concentrations in auto and office furniture, the local market is much more diversified than it was twenty years ago. Banks are focusing on the strengths and ethics of the current management team in place. Worries that the auto industry may decline over the next few quarters were mentioned.
• “Highly Levered” Transactions (those with a greater than 3:1 ratio of EBITDA to senior debt or 4:1 ratios to total debt and including loans used for buyouts, acquisitions, and recapitalizations) regulations are currently being issued. Banks are currently evaluating their portfolios and will be making decisions on whether to remain with these credits or to exit them.