In October, we distributed an alert about how the credit crisis was affecting the variable rate demand bond market. A lot has happened since October (mostly for the worse) as the overall economy is weakening and there appears to be a global recession on the horizon – so we are providing some key updates from our perspective below:
• The variable rate demand market has settled somewhat. Typical rates for tax-exempt VRDBs are down to around 1.5% in recent days, less than the October rates of up to 5.5%. However, since underwriters and remarketing agents are having enough trouble selling existing bonds, new issuances are hard to come by (though we have recently closed a new offering).
• The conventional loan marketplace is still very unsettled. Some lenders remain on the sidelines and are not writing new loans (even with the funds being made available to banks through the Trouble Asset Relief Program - TARP). (Please see other articles in this issue relating to TARP.) The current marketplace has shifted the leverage to the lenders.
• From the lending institution’s perspective, lack of competition among lenders for new loans has allowed them to be very choosy about which loans they want to pursue and as a consequence, charge higher interest rates and make more on each loan. This has allowed stable lenders an opportunity to use this situation to their advantage by selecting borrowers carefully in an effort to shore up their balance sheets.
• From the borrower’s perspective, besides paying higher interest rates, a borrower will likely be required to provide additional collateral (including personal guaranties in some instances) in order to have a lender approve the loan. The timeframe for closing on a loan has also increased substantially. As a consequence, we urge clients that may need funding (or may want to refinance) not to wait until the last minute.