More Loan Workouts Coming

Right now lenders say it should be a slight increase.

Many markets, industrial sectors, governments, and businesses are still trying to understand when, and if, society and the economy will come to a post-Covid period. Advisory firm FTI Consulting polled lenders in its annual survey and found that they, at least, see an effective end to the pandemic, giving them space to shift toward other plentiful worries.

Even with rising inflation and interest rates, slowing Fed bond purchases, ongoing supply chain issues, and geopolitical tensions in Ukraine and other areas, the lenders expected “relatively benign credit market conditions.”

“This represents a shift as COVID-19ʼs future impacts have fallen far down on our respondents’ list of concerns,” the report stated. “Instead, the focus appears to be if, and when, the U.S. market is no longer propped up by extraordinary federal support measures, will it be dragged down by inflation and supply chain’s cold grasp/?”

As of May 2021, lenders were focused on workouts, according to a previous FTI survey, in which 52% of respondents said that pandemic effects were driving loans their workout groups were actively managing.

As FTI noted, it “surveyed [executives at] large bank and non-bank lenders across the United States between January 20, 2022 and February 6th, 2022, including commercial banks, investment banks, private credit platforms, CLOs and BDCs.”

The results are interesting given the number of headwinds facing both lenders and borrowers. Many banks still have to reckon with commercial real estate loans that ran into trouble but got a reporting grace period through some Covid-19 legislation. That time is now up and again required reporting could trigger having to write down impaired values on balance sheets.

But then, CRE lending has continued to expand, as has market activity, and new business seems unlikely to potentially face the same types of surprises as happened in 2020. Furthermore, according to the poll results, retail, hospitality, and restaurants, which faced heavy impact and still do, are faring better than in 2021 and less likely to require defaults or workouts than then.

It also will likely be a good time to borrow. “Respondents believe that leveraged loan spreads, underwriting standards, and credit availability generally will remain borrower-friendly this year, though most expect loan spreads to increase from near record-low levels [in 2021],” the report said.

There is a hint of trouble further down the line. “Most respondents believe that Federal Reserve Bank’s actions in 2020-2021 will continue to keep default and restructuring activity depressed for another 6-12 months.” So, it’s likely wise to keep an eye out for conditions in the second half of 2022.