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The European financial crisis has sent jitters around the world. For corporate financial managers in the United States the crisis raises questions about the availability of credit for mergers and acquisitions, operating lines and other purposes. So far it appears that credit availability is good for firms with strong financials, though companies with marginal strength are still having difficulties securing loans.

Some signs of financial stress have been pushed upward, but by a surprisingly small magnitude. To gauge this, the following table shows various indicators of financial stress. The first column numbers are the average prior to the worst of the financial crisis, in the fall of 2008. The second column shows the worst of the crisis, the third column the post-crisis low, and the final column the latest available.

Indicator

Pre-2008 avg

Crisis high

Post-crisis low

Recent

TED spread

0.50

4.57

0.09

0.43

A2P2-AA spread

0.27

6.15

0.06

0.27

Baa-10 yr spread

1.80

6.16

2.37

3.02

Junk bond spread

5.08

21.82

4.52

7.48

Notes on the data:

  • The pre-2008 averages are calculated over different time periods, based on when the earliest data are available. As a result, these averages should be used to compare with recent data, but not from one spread to another.

  • TED spread is the difference in yields between Eurodollar banks deposits and United States Treasury bills, both of 3 month maturity.

  • A2P2-AA spread compares the interest rates on commercial paper of the two different grades.

  • Baa-10 yr spread is the difference between interest rates on corporate bonds rated Baa by Moodys and 10-year U.S. treasuries.

  • Junk bond spread is Merrill Lynch’s data on the yield adjusted spread between bonds rated less than investment grade and U.S. treasuries.

  • Although the risk measures are above their post-crisis lows, they are all far, far less than their 2008 highs.

Banks are lending more to commercial and industrial enterprises, according to the Federal Reserve’s latest data. C&I loan volume has increased 8% in the past 12 months. Both supply and demand are at work here. Part of the low weak demand of the recent past was due to credit-worthy companies not needing to borrow, along with banks having tightened credit standards.

Those credit standards have been gradually eased in the last year, as reported in the Fed’s quarterly survey of bank loan officers. The banks’ willingness to lend is further confirmed by the narrowing of lending spreads as banks compete for the business out there.

Thus, a finance officer contemplating a new bank loan need not be too worried about the European debt crisis, at least not yet. Those companies that have not been eligible for bank credit will still have a challenge, as the non-bank lending market has not returned to its previous vigor. Further, the European situation could deteriorate rapidly. Muddling through is probably the best forecast now, but nobody can discount the possibility of a general financial crisis that would impact United States bank lending.

Planning in finance teams should focus on maintaining the firm’s bankability. Scenarios that would push the company outside of bank lending standards should be studied with mitigating tactics developed.

For those businesses that are not quite bankable, improving financial ratios should be of paramount importance. Even if the corporation anticipates no need to borrow, the availability of a line of credit is often tremendously valuable. The sooner that bank credit can be assured, the better off virtually every company will be.

Source: The European Crisis And U.S. Financing Opportunities