The Credit Crunch - one year on.

It seems like a while since we first heard about the credit crunch but it was certainly surprising to hear that it’s apparently one year since it started.

For some interesting analysis of how it all started and where it’s all likely to go, you can have a look at the FT’s take on the whole thing HERE;

As a broker, we have certainly seen a tightening of terms over the past year and deals that were agreed in the autumn of last year will probably be the best agreed for many years to come.

We are now seeing Banks re-pricing entire debt facilities of clients when they come back for further advances which is necessitating refinancing packages and there are limited numbers of Banks now lending over Base Rate (as opposed to facilities linked to LIBOR – trading today at 5.76%).

Additionally, the loan to value levels of Banks are being pared back to represent their perceived risk and there needs to be some element of strength within deals to make them attractive to the remaining lenders in the market. Bank’s fees are going up and we are also seeing increasingly desperate tactics by Banks to win business as relationship managers look over their shoulder at mass redundancies.

It’s not all doom and gloom though, there are certainly still Banks around lending to the commercial markets and many of these are lending still up to around 80% loan to value, with aggressive margins over Base Rate.

From a brokers perspective, it’s an interesting time. Clients are coming to us with problems that their own Bankers, who promised much in the last 5-years can now no longer deliver.

David Burrows

The market is changing and anyone that tells you it isn’t is lying.

The market is changing and anyone that tells you it isn’t is lying.

The main question that we are being asked of us at the moment is ‘this business of the credit crunch - is it affecting anything?’. The short answer to this is yes. The longer answer is somewhat more complicated.

Undoubtedly the commercial funding market has changed significantly, even since Christmas. We are finding that deals that were approved ‘in principle’ in November are now having to be resubmitted to the lender’s credit department and coming back with interest rate increases , loan to value revisions and in some instances, flat refusals to take the deal on.

There’s more to this than meets the eye but the underlying reasons for this are quite interesting (if you are interested in that sort of thing..). What seems to have happened is that at the back end of last year there were lots of lenders about who were using the securitisation model of lending where they basically repackaged the debt that they wrote and sold it on in the secondary debt interbank markets. The interbank markets have now seized up with Banks not trusting each others underlying debt security. This means that the securitisation lenders have either withdrawn from the market completely or are only lending to people they know.

Long winded explanations aside, the main lenders left in the market are specialist departments of the Banks that can on the balance sheet model ie. those that lend against their deposits.

Now those balance sheet lenders have realised that they are the only players left in the market and that conditions have become more difficult. Perhaps unsurprisingly, they have started to realise that they can charge more or the same for the same or inferior products. This is the law of supply and demand in full effect.

It’s good news from a broker perspective as we still know the people that lend the most aggressively and cheaply in the market but not so great for those clients looking to do the deals on their own as existing sources or direct bank contacts dry up.

I don’t think we’ve seen the end of this by any means as I was warned about the sub prime exposure that some of the big city firms were sitting on at the start of ’07 and it’s only just starting to filter through. I’d expect to see more fallout from the sub prime stuff (especially that no-one has yet looked at some of the crap lending that has been done in this country yet) and perhaps job losses in some of the big Banks as the new business hunters that have been taken on in great numbers in the last few years have their wings clipped.

Doom and gloom I’m afraid but by all accounts Brokers are more useful in poor markets so I look forward to the rest of ’08 with interest.

David Burrows