Thursday, March 15, 2007

The Buzz in the Room

Tonight I attended a party celebrating the 40th year of operations for State Financial, a Los Angeles based lender which provides factoring and asset based loans to small and medium sized businesses in the Southern California marketplace and beyond. While a few of their clients were in attendance, I found many of the attendees were banks and other asset based lenders including factors.

Between bites of sushi and swigs of Pellegrino, I schmoozed with many of the funding sources and found the mood of the asset based lenders to be particularly upbeat. Why? They're seeing nice deal flow as many of the banks are no longer being as aggressive about pursuing marginal credits.

For the last three years, banks were funding deals beyond their standard risk profile chasing asset growth. When the prime rate is at 4.0%, a lot of sub-prime credits can still service the debt and meet covenants. Now that the prime rate is 8.25%, a lot of those sub-prime credits are starting to experience stress in their cash flows. This economic cycle is coming to an end and the banks are finally starting to tighten up a bit to stay ahead of the curve on bad loans. So the asset based lenders are no longer seeing as much competition from the banks with their lower cost funding.

Whether wishful thinking or reality, that was the buzz in the room.

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