Several quarters remain before bankruptcy attorneys return to high employment. However, weakness in specific sectors should provide an increased flow of near term bankruptcy activity.
Summary of 2015 Shared National Credit Review[1],[2]
In 2013, bank regulatory agencies (the “Regulators”) released the Interagency Guidance on Leveraged Lending (the “Guidance”) intended to curtail perceived excesses in bank lending practices. One of the most impactful elements of the Guidance was the rule that banks should not make “non-pass” loans. The Guidance defined “pass” loans as loans in which the borrower demonstrated the ability to repay all of its senior debt and one-half of its total debt in a five to seven year period.
The Guidance initially proved confusing and banks did not immediately adopt its recommendations to the Regulators’ satisfaction. After the Regulators criticized banks for non-compliance in the 2014 Shared National Credit Review (the 2014 “SNC Review”), banks appear to have gotten the message. After the 2015 SNC Review, Comptroller of the Currency Thomas Curry stated, “[T]he 2015 SNC Review found lower levels of leverage and improved repayment capacity in bank leveraged loan portfolios.”
Statistics compiled by the Loan Syndications and Trading Association shown in the charts below support the findings of the 2015 SNC Review.
Footnotes
[1] Coffey, Meredith, “SNC: Banks Complying With LLG Rules… But SNC Suggests Rules Might Change”, November 2015; Loan Syndication and Trading Website at http://www.lsta.org/news-and-resources/news/1/snc-banks-complying-with-llg-rules-but-snc-suggests-rules-might-change
Several quarters remain before bankruptcy attorneys return to high employment. However, weakness in specific sectors should provide an increased flow of near term bankruptcy activity.
Economic Outlook – Bankruptcy Attorneys
The current economic expansion is aging, but is likely to continue for several more quarters. The charts below provide insight into the economic outlook for the remaining duration of the current economic expansion.
Majority of Evidence – Signs of Stability
Source: united states department of economic analysis at http://www. Bea. Gov/national/
The chart above illustrates our progress through the current business cycle and the length of the prior two cycles. The expansion in the 1990’s remains the longest in US history. The chart above indicates that real GDP growth for the four quarters ending June 2015 averaged a healthy 2.7%.
Unemployment remains low (see chart above), while inflation remains under control (see chart below).
Source: federal reserve bank of minneapolis at https://www. Minneapolisfed. Org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913; note that the fed has targeted a 2. 0% inflation rate in recent years
The strong US dollar, weak oil and commodity prices and weak global growth are the primary contributors to today’s low inflation rate. Low inflation has allowed the Federal Reserve (the “Fed”) to leave the fed funds rate close to 0% for seven years.
The chart below shows the Fed raised the fed funds rate to fight inflation before each of the last two recessions. In this chart, corporate earnings are a proxy for economic growth. The Fed has not begun the tightening cycle which precedes business contractions.
Correlation between corporate earnings and fed funds rate
The yield curve remains a reliable predictor of the approach of the end of economic expansions.
Source: m. G. J, “the imf urges the fed to delay a rate rise”, the economist, september 3, 2015
The yield curve represents the yield on US Treasury obligations of various maturities. The Fed raises short-term interest rates to reduce the current inflation rate. This effort consistently results in a circumstance where short-term rates rise to yields considered appropriate for long-term Treasury bonds in the final stages of economic expansions.
Minority of Evidence – Signs of Instability
The weak global economy has resulted in weak commodity prices, particularly weak oil prices.
In the manufacturing sector, growth has almost slowed to contraction.
Source: national association of purchasing managers – manufacturers’ purchasing managers’ index
Energy sector weakness has a negative impact on companies that borrowed heavily when oil prices were expected to remain high.
Increasing distress in the energy sector has caused yields on syndicated loans to increase 100 basis points from May 2015.
Source: yield on leveraged loan 100 index at http://www. Leveragedloan. Com
Similarly, more than $5.2 billion in funds have been removed from the loan market since mid-July.
Source: funds flow from syndicated loan market at http://www. Leveragedloan. Com
Conclusion
Several quarters remain before bankruptcy attorneys return to high employment. However, weakness in specific sectors should provide an increased flow of near term bankruptcy activity.
Footnotes
[1] Source: United States Department of Economic Analysis at http://www.bea.gov/national/
[3] Source: Federal Reserve Bank of Minneapolis at https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-and-inflation-rates-1913; note that the Fed has targeted a 2.0% inflation rate in recent years
[5] Source: Standard & Poors Corporation at http://us.spindices.com/search/?query-S%26P+500+earnings&Search=GO&Search=GO – “Index Earnings” spreadsheet, Quarterly Data tab
[10] Source: Standard & Poors Corporation at http://us.spindices.com/search/?query-S%26P+500+earnings&Search=GO&Search=GO – “Index Earnings” spreadsheet, Quarterly Data tab
[11] Source: National Association of Purchasing Managers – Manufacturers’ Purchasing Managers’ Index
[12] Source: Kakouris, Rachelle, “Oil & Gas Cos Could See 40% Decline in Borrowing Base – Survey”, September 23, 2015 at www.leveragedloan.com/category/distressed-debt/
[13] Source: Yield on Leveraged Loan 100 Index at http://www.leveragedloan.com
[14] Source: Funds flow from syndicated loan market at http://www.leveragedloan.com
