Instructions
· Read the following:
"Slow Economic Recovery Could Squeeze Smaller Lenders" by Kristin Broughton, The Wall Street Journal, May 31, 2020
· Answer both of the questions listed below.
· Cite at least one additional article and include in text citation.
Discussion Questions:
· Describe why nonbank lender growth comoves with the credit cycle.
· What challenges did non-bank lenders face during the Covid-19 crisis in securing sources of funds?
Instructions · Read the following: "Slow Economic Recovery Could Squeeze Smaller Lenders" by Kristin Broughton, The Wall Street Journal, May 31, 2020 · Answer both of the questions listed below. · Cite at least one additional article and include in text citation. Discussion Questions: · Describe why nonbank lender growth comoves with the credit cycle. · What challenges did non-bank lenders face during the Covid-19 crisis in securing sources of funds? 11/8/2020 Slow Economic Recovery Could Squeeze Smaller Lenders - WSJ https://www.wsj.com/articles/slow-economic-recovery-could-squeeze-smaller-lenders-11590930000 1/4 President Biden ���✓ ��� Electoral Votes to Win Senate �� Dem — �� Rep �� for majority This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit https://www.djreprints.com. https://www.wsj.com/articles/slow-economic-recovery-could-squeeze-smaller-lenders-11590930000 CFO JOURNAL Slow Economic Recovery Could Squeeze Smaller Lenders Nonbank lenders might need to raise capital in the months ahead to support the small- and medium-size businesses who borrow from them ‘When the virus hit it was like everything stopped in one day,’ said an analyst who covers nonbank lenders. PHOTO: STEVEN SENNE�ASSOCIATED PRESS By May 31, 2020 9�00 am ET Kristin Broughton https://www.wsj.com/election-results-2020/?mod=summary-banner https://www.wsj.com/news/types/cfo-journal?mod=breadcrumb 11/8/2020 Slow Economic Recovery Could Squeeze Smaller Lenders - WSJ https://www.wsj.com/articles/slow-economic-recovery-could-squeeze-smaller-lenders-11590930000 2/4 A slow economic recovery could test the strength of nonbank lenders, forcing many to raise capital if the businesses that have borrowed from them struggle to recover or shut down after the lockdown enforced during the coronavirus pandemic. Business development companies that lend to small- and medium-size companies expanded rapidly over the past decade, with publicly traded BDCs increasing total assets by nearly fourfold to $83.6 billion as of the first quarter of 2020, according to Refinitiv, a market data provider. Several of these companies, including FS KKR Capital Corp. , New Mountain Finance Corp. , and Oaktree Specialty Lending Corp. , this month reported quarterly losses, largely due to markdowns on their loan portfolios. In the coming weeks and months, these private-credit lenders will be looking to maintain enough cash to fund loan commitments, pay down debt, and keep their financing options open, analysts said. But for some lenders, that could prove to be challenging, particularly as a large number of borrowers are expected to draw down credit lines to weather the slow pace of economic recovery. “In good economic times, they were harvesting the gains,” said Mitchel Penn, an analyst who covers the industry for Janney Montgomery Scott LLC, pointing to strong liquidity generated by prepayments on loans, as borrowers found better deals or sponsors sold portfolio companies. “But then when the virus hit it was like everything stopped in one day.” Already, lenders such as FS KKR Capital and Golub Capital BDC Inc. have announced capital raises of $250 million and about $300 million, respectively, in recent weeks. “We want to use the proceeds to fortify liquidity and to create more flexibility,” said David Golub, chief executive at Golub Capital, during a May 11 earnings call when asked how he NEWSLETTER SIGN-UP CFO Journal The Morning Ledger provides daily news and insights on corporate finance from the CFO Journal team. PREVIEW SUBSCRIBE https://www.wsj.com/articles/high-risk-lenders-have-been-hit-hard-by-coronavirus-market-turmoil-11584744602 https://www.wsj.com/market-data/quotes/FSK https://www.wsj.com/market-data/quotes/NMFC https://www.wsj.com/market-data/quotes/OCSL https://www.wsj.com/market-data/quotes/GBDC 11/8/2020 Slow Economic Recovery Could Squeeze Smaller Lenders - WSJ https://www.wsj.com/articles/slow-economic-recovery-could-squeeze-smaller-lenders-11590930000 3/4 plans to use the new capital. BDCs have taken steps to shore up cash since the pandemic began to unfold, in some cases increasing their credit lines from traditional banks or slashing dividends. Harvest Capital Credit Corp. , a lender whose portfolio includes a pawn-store operator and a hand-tool maker, said it has shifted its strategy from increasing investments to preserving capital, and has suspended future dividends. Harvest Capital, which posted a $3.7 million net operating loss for the quarter, said it might not be able to extend its bank line of credit that matured on April 30. “We do have an active dialogue going on, and we’re all hopeful we’ll be able to extend it,” William Alvarez, Harvest Capital’s chief financial officer, said during the company’s May 13 earnings call. “But again, these are unprecedented times, and everybody is treading water very cautiously.” The pandemic marks a major test for these nonbank lenders, many of which were formed after the last downturn and moved into higher-risk areas of commercial lending that traditional banks shunned. Credit losses are expected to increase in the coming months, highlighting the underwriting standards that these development companies used when the economy was strong, analysts said. “We haven’t seen underwriting through a full cycle,” said Chelsea Richardson, an analyst at Fitch Ratings who covers the sector. Another pressing factor for these lenders is the need to keep up with regulatory leverage ratios, analysts said. Maintaining a debt-to-equity ratio of below two-to-one is critical for CFOs who want to keep their financing options open as they move through the downturn, according to Lisa MORE FROM CFO JOURNAL Zoetis CFO Boosts Third-Party Orders as Pet Owners Drive Sales November 5, 2020• What CFOs Are Saying About This Week’s Elections November 2, 2020• Five Things That Could Change for CFOs After the Nov. 3 Elections November 2, 2020• Colgate-Palmolive Taps New CFO As It Navigates High Demand October 30, 2020• https://www.wsj.com/market-data/quotes/HCAP https://www.wsj.com/articles/sec-steps-in-to-help-struggling-loan-funds-11586460925 https://www.wsj.com/articles/many-companies-ask-lenders-to-give-them-a-break-11590524697 https://www.wsj.com/articles/zoetis-cfo-boosts-third-party-orders-as-pet-owners-drive-sales-11604621024 https://www.wsj.com/articles/what-cfos-are-saying-about-this-weeks-elections-11604351813 https://www.wsj.com/articles/five-things-that-could-change-for-cfos-after-the-nov-3-elections-11604313002 https://www.wsj.com/articles/colgate-palmolive-taps-pitney-bowes-executive-stanley-sutula-as-finance-chief-11604065133 11/8/2020 Slow Economic Recovery Could Squeeze Smaller Lenders - WSJ https://www.wsj.com/articles/slow-economic-recovery-could-squeeze-smaller-lenders-11590930000 4/4 Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit https://www.djreprints.com. Kwasnowski, an analyst who covers the industry for DBRS Morningstar. Anything higher could put companies in violation of their bank loan or debt agreements, and potentially take a number of financing options, such as obtaining an additional loan, off the table, she said. But staying below the regulatory limit—or below lower targets that BDCs set internally— could be challenging. BDCs mark their loan books at fair value, meaning the value of their loan portfolios can fluctuate. If loan values continue to drop as businesses struggle to reopen, leverage ratios could tick higher as a result of equity values declining. That could push more BDCs to raise capital from equity investors, analysts said. And demand for lenders with a solid understanding of niche markets, and a strong record of lending to distressed companies, could be strong, Ms. Kwasnowski said. “There’s a reason why these entities exist, and the strong ones may find ways to benefit,” she said. Write to Kristin Broughton at
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