The famous Keanu Reaves and Patrick Swayze thriller about surfing and bank robbing tells a great story about an FBI agent learning to catch both waves and bank robbers. If you talk to the non-bank world these days everyone is just looking to catch a break. The waves or in this case bank kick-outs are slim and everyone is waiting around to catch a wave, literally any wave. The market is tough right now and we all know it. Triple P went further than anyone thought as it was purely indiscriminate. Every company received it and those that did not need it ended up receiving a 1% loan from the government. Said differently, the government provided junior capital at L100 to anyone who asked. This situation plus lax regulatory pressure leaves banks in a much less time pressured position as way more clients than expected were awash with liquidity. The banks went from a portfolio nightmare to a revenue nightmare to cost cutting exercise – 3 seasons in 3 months. On the flip side this left the non-bank crowd in a very stressed position given their need to deploy capital. Billions have been raised for this very moment and there is no product. The proverbial question is when will the point break.
It will happen, but not this quarter as recent bank loan sales tell the tale. Banks are getting historically high pricing for highly distressed credits. In any normal market banks would be getting much less for troubled loan sales, but right now is not a normal market. Too much capital is out there for literally no product. Non-banks, especially distressed funds are starved for products and banks are taking advantage by selling certain loans now. Bank took historic-level reserves and then Triple P bought the country time. Business owners cut costs and smartly preserved liquidity. The combination of government subsidies, time needed to staff up and companies hoarding cash created an unforeseeable situation where non-banks were at a stark disadvantaged for a widely foreseen downturn. The two-sided story to this is that banks and non-banks alike were directly and indirectly subsidized by the government as banks’ are sitting at strong and unexpected liquidity levels even though many clients’ financial performance are lackluster.
Non-banks got subsidized too as their clients received stimulus capital to pay down lines of credit and stay in business. Non-banks, especially ABLs quickly succumbed from anticipated portfolio nightmares to diminished portfolios and the need to book new business. This is the opposite of what should have happened. The ABLs should have been order takers and market makers rather than dehydrated from anemic originations. This is pervasive and anyone who says otherwise is not be candid regarding market conditions. The author has canvassed the market and the going is tough. The question is when the market will reach its Point Break at which point banks have to start kicking out clients.
Just like the movie, one group is chasing the other. Non-banks are pushing very hard right now on the bank world to start pushing out clients who might have liquidity, but have poor financials that in a different market would have been pushed out already. Ironically, the lending market went from top to bottom back to top in a matter of six months. March hit the low and by October the markets were back to frothy again. So the risk now is whether the non-banks will take on too much risk too soon as the banks are clearly going to hold off until 2021 until they start shedding assets in earnest. Apparently, catching waves is easier than understanding the timing of banks. When will the market break?
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