Lending Continues to Broaden Beyond Banks

Lending to small businesses has yet to return to pre-crisis levels. This creates a gap between current GDP growth and potential GDP growth. The gap is caused by: 1) additional regulation on traditional sources of capital (i.e. banks) and 2) extended payment terms in the wake of the crisis: payments conventionally needed to be made within 30-60 days, that number has risen to 90-120 days. Since small businesses are less able to get loans from banks to bridge now-wider trade terms, the Wall-Street Journal reports, larger companies are increasingly lending money to smaller companies they do business with. This phenomenon is not new (think, analogously, of Toyota providing auto leases to customers buying Corollas), but it is growing. Ebay Inc., whose debt is held in SNWAM portfolios, recently began an initiative to provide working capital loans to merchants on up to 8% of their sales. This kind of lending has far less regulation than traditional banking. There is a risk of abuse similar to the predatory lending leading up to the mortgage crisis in 2008. It is perhaps apropos, then, that Ally Financial, formerly GMAC, the General Motors’ auto-lease financing arm which expanded into mortgage lending, recently went public because it may serve to remind investors that straying too far from the core business competencies can be risky (GMAC required a large bailout during the crisis because it over-extended its capabilities). Lending is itself a risky business, as we know all too well as bond portfolio managers (every bond we buy is a loan to the issuer). This is where credit analysis is crucial. We maintain a universe of investable securities that is large enough to provide portfolios with opportunities for meaningful return, while simultaneously not growing that universe too large as to overexert our capabilities. We have never had a bond default or a missed interest payment in a client portfolio. The line between overexertion and capturing meaningful returns is the position non-traditional lenders are currently navigating. It remains to be seen if overexertion can be avoided.