Enough is Enough

In yesterday's Wall Street Journal, writer Michael Hudson asks "Is the Corporate-Credit Party Almost Over?". The corporate debt markets have been in a bit of tizzy in the last few days over the reduction in the junk bond offering by Thomson Learning and the withdrawal of the bond offering helping fund the leveraged buyout of U.S. Foodservice. Coming on the heals of the Bear Stearns hedge fund near collapse, the possibility is growing that the party days of the corporate debt markets may be nearing an end.

As the article pointed out, the excessive amounts of liquidity in the corporate debt markets have resulted in extremely high levels of leverage for many of the largest companies. Whereas a few years ago, five times EBITDA was considered an outer limit for leverage, some companies in the leveraged buyout market have been using leverage as high as ten times EBITDA. As I pointed out weeks ago, this house of cards may be in for a tumble real soon.

The impact to small business? The excessive liquidity for large corporate borrowers has forced banks serving small business to allow increased leverage and provide easier credit terms to its small business borrowers as well. Anything that upsets the corporate debt markets for the largest borrowers will eventually find its way down to the market for small business borrowers.

I had lunch yesterday with a lender for one of the nation's largest commercial finance companies. His primary target are borrowers with business loan needs of $5 million to $20 million. This is probably the upper end of the small business market. He competes with both banks and asset based lenders to generate loans. He sees little evidence that the market is saying "enough is enough" when it comes to easy credit and liberal terms and cites continued fierce competition amongst lenders for new loan business.

Stay tuned to see how the market for small business loans turns out!

Happy 4th of July!

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Related Tags: small business, business loan, EBITDA, Wall Street Journal, banks, asset based lender, commercial finance