Finance Companies Emerge from Downturn but Still Face Risks
The U.S. economy’s gradual recovery is providing tailwinds for specialty finance companies as they emerge from the worst economic downturn since the 1930s, says Standard & Poor’s Ratings Services in an industry report card.
Selected excerpts from The Economic Recovery Provides Tailwinds For U.S. Finance Companies In First Quarter, But Risks Remain (Premium)”
Consumers and businesses are beginning to spend again–which may eventually drive increased loan demand. Nonperforming assets (NPAs) remain substantially elevated across all asset classes, but signs of stabilization are emerging, particularly for non-real estate consumer and commercial credit. Residential and commercial real estate (CRE) remain deeply troubled. But even here, we expect the benefits of a more-buoyant economy to lay the foundation for an eventual stabilization in asset values.
Credit markets are also vastly improved from the depths of the “credit crunch” in September 2008, when even the highest-rated finance companies found their funding options eliminated. The availability and pricing of debt financing has improved materially since then, in large part due to actions taken by the U.S. government to restore confidence in the credit markets. The asset-backed securities (ABS) market has reopened for “vanilla” asset classes such as autos and credit cards, and an active high-yield market has allowed finance companies to refinance their obligations (the unsecured debt markets remain open to only the highest-rated finance companies).
Companies focused on CRE defied these trends and generally remain troubled. NPAs are still increasing due to the dearth of available refinancing opportunities for borrowers. Funding options are extremely limited for CRE-focused companies and lenders have been less generous renegotiating and extending lending agreements. We believe these dynamics could drive further downgrades of CRE-focused companies in 2010.
Despite the benefits of economic tailwinds for most U.S. finance companies, we think risks and uncertainties still remain.
While a “double-dip” recession now seems unlikely to us, the economic recovery remains fragile and the credit markets continue to be sensitive to macroeconomic events: the current crisis in Greece is an example. We expect that regulatory burden will increase across the U.S. finance company sector, from newly designated bank holding companies to small consumer lenders that heretofore have had minimal federal oversight. Lastly, in our view, perhaps the biggest uncertainty is the unchartered territory through which U.S. finance companies will be navigating in the coming years.
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