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Bank Debt Continues to Get Cheaper

Waypoint Private Capital experts provide their point of view on borrowing costs.

bank interest rate chart

Bank Debt Continues to Get Cheaper

The professionals at Waypoint Private Capital spend a lot of time meeting with bankers as we work on deals and continue to expand our network of lenders. This allows us to keep our finger on the pulse of the market and help our clients meet their needs. One consistent message we are getting from loan officers at large and small institutions is that the banks are flush with cash and trying to make good loans. We are still close enough to 2008 that the lenders and regulators remain focused on high quality loans, but structures are easing, and the loans are becoming cheaper.

The Dynamics at Work

There are a few dynamics at work causing the structures and pricing to get better. First, the banks are sitting on a lot of cash. Cash and balances due at U.S. banks as a percentage of total assets was 9.41% as of Q3 2012, which is very high compared to the trough level of 3.63% in Q1 2007. The second factor is that as cash and assets have been growing, loans have been shrinking as a percentage of assets. The net loans to total assets ratio was 52.1% in Q3 2012 versus the peak over the past 10 years of 61.0% in Q4 2005. Banks need to earn a return on their cash and thus want to be making loans. The third factor is a result of the first two. As banks see cash increasing and loan volume lagging behind they make a push to increase loan volume. They do not want to decrease the quality of their loans, so the primary tools they have to compete are structure and pricing.

Structure is hard to measure with data, but the anecdotal evidence we have gathered through conversations with lenders certainly points to more borrower friendly structures such as longer amortizations, higher advance rates, and less restrictive covenants. Pricing data, however, is measured and reported. Borrowers are primarily concerned with the rate they pay on their loans, which is most closely reflected in the FDIC data as the yield on earning assets. As you can see in the chart to the right, yield on earning assets has been steadily declining for eleven of the past twelve quarters. A falling yield is great, but banks only control some elements of that yield. In a competitive environment they use the net interest margin as a tool to generate more loan volume. By decreasing their net interest margin, they decrease the spread over their cost of funds and thus make borrowing more affordable. The chart below shows how the net interest margin has been declining over the past 12 quarters.

Borrowing Cost Factors

Waypoint Private Capital helps our clients determine how much debt is appropriate for their companies. We then introduce the opportunity to the lenders who are the best fit for our clients and help to secure a long-term banking relationship. When appropriate, we arrange credit enhancements with the USDA and SBA which further improves the structure of most loans.

borrowing cost factors chart


About Waypoint Private Capital

Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.

To learn more visit or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.

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Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2012 Waypoint Private Capital, Inc. All Rights Reserved.

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