Interest on a Loan? Check to See If You’re Stressed

By Marcelo Bermúdez, President, Figueroa Capital Group

The key to understanding the lender-borrower relationship hinges on how banks are analyzing and underwriting lending scenarios.

By Marcelo Bermúdez,
President, Figueroa Capital Group, a subsidiary of Charles Dunn Co.

Global events continue to dominate the headlines and have had a mixed effect on commercial real estate transactions. A potential Greek default, Chinese inflation scares, and an Italian debt crisis coupled with an American president who seems to have lost the ability to communicate with Congress on the debt limit provides little encouragement for bankers who need yield through their lending products. Investors continue to look for “deals” because of these headlines, but tend to discount what is truly going on in their local market. Publicly traded companies are sitting on up to 15 percent cash on their balance sheets but continue to employ a wait-and-see approach, resulting in few new hires and an increasing unemployment rate.

Capital is definitely available, however. Most conversations with banks by our office have revealed that they are flush with cash, but have no potential borrowers because of lack of credit quality or a flight to safety. Banks are improving asset quality through deposit and liquidity buffers which is a good sign for the long-term. Delinquencies have not had as heavy an impact as predicted, and lenders and disposing of non-performing loans since the kick-the-can approach has come to an end.

Borrowers feel the frustration of lending and leasing processes. They can be much like Charlie Brown trying to kick the football with Lucy holding it — a lot of work on the front-end, only to have the commitment pulled because of a change of heart during a credit-committee meeting.

The key is to understand how banks are analyzing and underwriting a lending scenario, which is how Figueroa Capital creates the most value for its clients. Fixed rates for portfolio lenders or traditional commercial banks will hover in the 5 – 6.5 percent range, while floating rates can be in the low-4 percent sandbox. While most borrowers will focus on the rate, a bank’s stress tests make a world of difference. Some lenders will use an index like LIBOR, plus a spread of anywhere to 300 to 600 basis points.

Knowing which lenders use a lower stress-test spread and have the lower cost of capital (either through a particular index or a value they use internally), will better ensure the closing of a deal and can provide up to 10 – 15 percent more leverage in a deal. More banks will fail this year, which will continue to pave new opportunities for other lenders who are flush with deposits and who need to place it back in the market. Expect to see increased flexibility with interest-only options for the first 12 – 24 months to ensure your scenario can close.