State of debt markets

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March 13, 2023

by a searcher from University of Toronto in Toronto, ON, Canada

In light of the current high interest rate environment and SVB failure (now Signature Bank as well), what types of loans or investments can we expect banks to refrain from underwriting, if any, in the search space due to potentially increased risk aversion, and how might this environment affect credit availability in the coming months/year to finance transactions?

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Reply by a lender
in Yorba Linda, CA, USA
We are in the early stages, so hard to say. I'm commenting on the entire banking industry, not any particular bank as a preface.

This particular banking "crisis" (It's my third such event in my career) is not driven by loans. Credit quality has been excellent, bank capital ratios solid (required by post GFC regulation). This is driven by the *deposit* side of the house (SVB had large deposit inflows in 2021, but not enough loan demand to put them to use, so they made bad decisions about investing the in low interest rate, long-duration treasuries) - which makes it very unusual. It's definitely a large enough event that it is surely going to re-shape the way things are done on the credit side of the house too though, most likely. Small banks do a great job at serving SMB credit niches (such as search funds), and they need reliable, low-cost deposits to do that. Those just became harder to count on (magnitude and longevity of this circumstance still not predictable). Not sure how that changes credit appetite, but it has to be factored in. SBA loans are safer and the 75% guaranteed portion can be made liquid to a bank via sale to secondary market, both of which make them much more attractive than conventional loans in this circumstance. So, expect it to be much easier to qualify for SBA than conventional (already is, but probably gets much more so).
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I produced a video on this topic this weekend, a link of which is below. This is a very unusual situation and way different then what we experienced in###-###-#### Unfortunately I do not think that what happened with these Banks is going to slow down the Fed from continuing to raise interest rates. Their focus is on inflation and the job numbers, and even two Banks going down is not going to change that. And even if they did pause, it would not reverse the damage rising interest rates has already caused Banks with their investment portfolios. But the situation with Silicon Valley bank was somewhat unique, which is why I do not believe it is going to be an epidemic in the banking market, at least not if calmer heads prevail.

https://www.youtube.com/watch?v=Js0ruOYUMuI&t=7s
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