Issuance has remained robust among blue-chip borrowers and higher-rated junk issuers, while U.S. leveraged loan sales are down roughly 27% year-over-year, Bloomberg league table data shows. Issuance from CCC rated firms—the weakest borrowers—is down on the year.
“You’ll start to see the economy slow down,” said Joe Kalish, chief global macro strategist at Ned Davis Research. “It’s just taking a while to filter through the economy.” He adds that overall loan growth is “pretty anemic.”
Signs of Slowdown
The Fed’s latest survey of senior loan officers at banks, known as SLOOS, showed that respondents saw tighter standards and weaker demand for C&I loans to firms of all sizes during the third quarter. The quarterly poll offers a broad window into the state of the credit market, and has been a keenly watched indicator of the health of U.S. lenders since the string of regional bank collapses in March.
The weaker loan demand is being driven by fewer investments in plants or equipment, a decline in financing needs for inventories, accounts receivables and mergers or acquisitions, as well as lower demand for cash and liquidity, according to the poll.
Among the banks, tighter lending standards were attributed to a less favorable or more uncertain economic outlook, reduced risk tolerance and less aggressive competition from bank and non-bank lenders. Other reasons included worries around legislative changes, supervisory actions, or changes in accounting standards, as well as lower liquidity in the secondary market for C&I loans.
“The chain of a reaction is usually quite pronounced,” said Gregory Daco, chief economist at EY-Parthenon, in an interview. “Credit is essentially the oil that greases the engine” that allows for the smooth functioning of the economy, he added.
So far, investors are largely positioned for a mild slowdown—one that doesn’t price in a steep contraction in growth over the coming year. That’s partly because the U.S. economy has proved more resilient than expected since the Fed began raising rates. Gross domestic product accelerated to a 4.9% annualized rate in the third quarter—more than double the second-quarter pace.
Still, some say that it’s only a matter of time before the combination of higher rates and less corporate borrowing takes hold.
“Economic conditions—they are going to deteriorate and we’ve already started to see that,” Karissa McDonough, fixed income strategist for Nottingham Trust—a division of Community Bank—said on Bloomberg TV Friday. “You are starting to see distressed debt on the rise. You are starting to see problematic access to capital markets for a lot of borrowers. So, we think the economy part is what’s really going to be driving yields down longer-term.”
This article was provided by Bloomberg News.