In our recent monthly commentary, we discussed the narrow profits recovery that has been mostly confined to the financial sector. Today we’ll talk about the improvement in corporate credit conditions since the credit crisis hit its peak in the months following the Lehman bankruptcy, and how it seems to be confined to companies with access to the corporate bond market.
Conditions in corporate credit just keep getting better and better. Spreads have tightened to more normal levels, and the absolute yield on investment grade and high yield corporate debt is just about as low as it’s been in 40 years. Not surprisingly, a record amount of junk bonds were issued in March as companies took advantage of the increased risk appetite of investors. “Covenant lite” features like payment-in-kind toggles, which allow companies to make their interest payments with more bonds instead of cash, are even reportedly making a comeback (WSJ subscription required). For companies large enough to have access to the corporate bond market, this loosening of credit has helped them repair overleveraged balance sheets and refinance more expensive debt. However, not all businesses have access to this market. In fact, most don’t. This morning’s National Federation of Independent Business (NFIB) Small Business Optimism Index sheds a little light on the availability of credit to the kinds of businesses that employ nearly half of all workers in the US, according to ADP: companies with fewer than 50 employees.
The NFIB survey, which polls companies on topics like revenues, labor costs, inventories, and employment, fell to 86.8 in March from 88.0 in the previous month. There are many underlying trends in the survey that are interesting, but those related to credit availability stood out the most. For instance, the number of companies reporting that credit was harder to get than last month reversed previous improvements and reverted to previous highs.
Also, the net percentage of companies expecting credit conditions to get easier in the next 6 months fell back to previous lows.
This doesn’t look like a picture of improving credit.
Big companies may have access to capital markets made up of eager lenders with looser standards (i.e.,the corporate bond market), but small businesses are still dependant on the banking sector. And the lending conditions in the banking sector seem to be somewhat tighter than the bond market. Instead of matching the record issuance volumes of the high yield market in March, commercial and industrial loans and leases on bank balance sheets continued to fall, to the tune of $11.4 billion during the month.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.