Like a Fly Hitting a Windshield

According to today's Wall Street Journal article entitled, "Behind Buyout Surge, A Debt Market Booms", questions continue to be raised over whether the oversupply of corporate debt could lead to a shakeout in business loans similar to that being experienced in the subprime mortgage market.

The Wall Street Journal article quotes a recently released Standard & Poor's report that says "We are witnessing a loan market rife with liquidity and disproportionate power in the hands of borrowers, arrangers, and financial sponsors". Now in English - too much money chasing too few deals. With looser underwriting standards and a noticeable decline in the ability of some companies to service debt obligations, one possible outcome is mistakes by stupid bankers leading to loan defaults.

Not everyone is concerned. "Like a fly hitting a windshield" is the description of one investor in these collateralized loan obligations which have provided all this liquidity. The investor believes that its diversification of its loan holdings will offset a default or two in the corporate loan market.

So how does all of this impact small businesses seeking business loans? If the economy stubs its toe and one or two deals end up in default, the impact is likely to be minor. However, if the economy experiences more than a couple of defaults from significant business loans, we might see a fallout similar to that being experienced by the subprime mortgage market.

If that happens, borrowers large and small will experience a tightening of credit and higher interest rates.

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Related Tags: Wall Street Journal, Standard & Poor's, business loans, collateralized loan obligations