Financial market volatility changing lender environment - Third Quarter Review

The biggest difference between the midyear and third quarter has been increased interest rates and spreads, decreased loan-to-value ratios and generally more conservative underwriting by Wall Street in response to volatility in the financial markets.

Some investment firms, badly burned, have withdrawn from lending - at least for the time being. Others have become more cautious. The result is that the focus of the lending market is shifting from securitization, where there had been an ever-increasing number of lenders aggressively pursuing loans, to more traditional lending sources.

As investment banks take a step back to reassess their positions, the winners in the new environment will be commercial and savings banks, and insurance companies that hold loans for portfolios.

Borrowers may now find that, for many transactions, it will be easier and more efficient to close with a commercial or savings bank that does not require the reserves usually required by securitization lenders. In light of recent developments, borrowers might want to concentrate on lending institutions that are going to be reliable in the long-term, can close quickly and will fix a rate or spread.

The good news for New York is that the metropolitan area has a high number of active savings and commercial banks that can adequately serve the market. The bad news is that some parts of the country have fewer of these traditional lenders to pick up the slack left by Wall Street.

Dependent upon the quality of the loan and credit status, certain borrowers, regardless of geographic region, will find their financial options somewhat reduced.

Borrowers with less than "A" credit who are seeking financing for a highly leveraged deal, or need larger loans that exceed the legal lending limits of most savings banks, will find securing financing to be a more arduous route than a few months ago. Those seeking conservative loans, loans between $1 million and $10 million, and/or have "A" credit will find little change.

Though there may less lenders in the market, there are still attractive loans available at attractive rates. In addition to commercial and savings banks, traditional life insurance companies are also still in the market and looking for top-tier loans.

The securitization industry anticipated that there would be a shake-out in lenders and, indeed, now there has been. The market itself is extremely organic. If it stabilizes and the remaining securitization firms continue to make money, then those that have exited, or merely detoured, from the market will find their way back.

COPYRIGHT 1998 Hagedorn Publication
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