“Thawing Credit Market Should Ease Concerns” – NFW part 2

Further to our post from last week (“‘Thawing Credit Market Should Ease Concerns’ – NFW” October 21-08):

The recession is the primary concern of the folks who manage the credit groups at any lender, large or small.

Positive changes in the lending environment are far more methodical; think glacial.

Here is an excerpt from a New York Times editorial, with some information via JP Morgan that confirms the “NFW” part of our original post:

Loans? Did We Say We’d Do Loans?

According to Treasury Secretary Henry Paulson, the chief proponent of the big bank bailout, flooding the banks with taxpayers’ money was supposed to get them to start lending freely again. And that, in turn, was supposed to stabilize the markets and prevent the downturn from being worse than it otherwise would be.

Now, lo and behold, with $250 billion in bailout funds committed to dozens of large and regional banks, it turns out that many of the recipients of this investment from taxpayers are not all that interested in making loans. And it appears that Mr. Paulson is not so bothered by their reluctance.

In his column on Saturday, The Times’s Joe Nocera told about a conference call that he had listened in on recently between employees and executives of JPMorgan Chase. Asked how an infusion of $25 billion of bailout funds would change the bank’s lending policy, an executive said the money would be used to buy other banks.

“I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way,” the executive said. He added that the money could also be used as a backstop in case “recession turns into depression or what happens in the future.”

There was not a word about lending — not to businesses or home buyers or car buyers or students or other consumers. Just the opposite. In response to another question, the executive said that the bank expected to continue to tighten credit.

JPMorgan Chase is not alone. The Wall Street Journal reported on Tuesday that some regional-bank recipients of the bailout money had acknowledged that only a small portion would be used for loans and the rest for acquisitions and other purposes.

If you have an annual review coming up at your bank, plan on tougher covenants and the potential for a smaller lending facility. Or, that wonderful sidestep: “we’ll renew your facility if you can find a syndicate partner for it”.

This will become the banking world’s rendition of that great break-up line: “It’s not you, it’s me”.

If you don’t like what you are hearing, give us a call. We have plenty of capital available for the small and mid cap Canadian companies, both private and public. With two very happy exits in the past month (for our portfolio companies as well as ourselves), we actually have more money available today than two months ago; quite a unique situation in the current environment.

Given the recessionary outlook, critical mass is now more important than ever. And business plans with large burns need to consider the advice that Silicon Valley venture fund Sequoia gave to their portfolio companies recently. The slide show is excellent, and can be found here.

MRM