Over the past week, we’ve flagged the sharp slowdown in C&I lending that seems manifestly at odds with the sentiment data that the Trump administration likes to point to in defense of the notion that the President has ushered in a new era for the US economy.
Specifically, here’s what we said on Monday:
We thought the following brief excerpt was interesting. Essentially what it says (and what the graph shows) is that contrary to Trump’s contention that confidence in the outlook for the economy is riding high, it’s actually collapsing at the fastest pace since 2008 if you think business lending matters.
- There is another worry on the horizon. US corporate and industrial loan growth has been decelerating quickly. Loans in the week to 15 March were more or less the same as they were at the end of October. As a result, the year on year growth in lending has been drying up. Chart 1 shows that the deceleration decline has been as fast as it was in 2008 or 2002.
Well clearly, that’s a rather disconcerting visual and if the growth in lending is indeed decelerating at the fast pace since the crisis, we need to know why.
On Wednesday, Goldman has ventured an answer.
Essentially, the bank argues that as capital markets have reopened to the (previously) beleaguered US energy complex, companies have begun to pay down credit lines. Here’s more…
The sharp deceleration in commercial and industrial loan growth has generated a sense of cognitive dissonance among market participants, who are otherwise confronting generally encouraging growth data. Candidate explanations such as a step-down in investment demand or a sudden tightening in credit conditions seem at odds with recent growth and financial indicators, including a strong start to the year for corporate debt issuance.
An alternative explanation is that C&I bank loans represent yet another casualty of the energy sector contraction of 2015 and 2016. More specifically, we believe the current C&I slowdown reflects payback from credit facility usage by commodities firms, many of which began drawing upon credit lines in late 2015 as financial conditions tightened and the debt issuance window closed. Following a brief acceleration in C&I lending in early 2016, bank loan growth waned in late 2016 and early 2017 once capital markets reopened and banks renegotiated and restructured credit lines. Available loan data are consistent with the timing and sector-level incidence of these inflections, and in our view, the credit line payback story is the most likely explanation of the current C&I loan shortfall, which we peg at roughly $100bn.
Debt markets seized up in late 2015 as oil prices fell into the mid-40s – below the breakeven cost of production for many US shale producers – and the high-yield issuance window closed for roughly ten months (August 2015 – April 2016). Lacking access to capital markets and with internal cash generation impaired by lower commodity prices, many exposed firms were incentivized to draw upon pre-existing credit facilities. Overall C&I lending accelerated during this period, as visible in Exhibit 1. At the same time, the deterioration in commodity prices weighed on financial results and interest coverage ratios in that sector, resulting in deteriorating overall C&I credit quality (see left panel of Exhibit 2). Within the commodities sector in particular, financial institutions recorded over $150bn of bank loans as either “Classified” or “Special Mention” – two classifications indicating potential credit concerns – based on data from the Office of the Comptroller of the Currency (right panel of Exhibit 2).
Additionally, US oil & gas bankruptcies over the last two years have totaled over $70bn in terms of cumulative liabilities (right panel, Exhibit 3). To the extent that some of these liabilities represent bank loans, any subsequent defaults or collections would also reduce the current level of C&I lending. The timing and sector-level incidence of these various inflections are consistent with a “credit line payback story,” in which temporary credit facility borrowings in early 2016 were gradually paid back, as capital markets reopened and as banks renegotiated and restructured some credit lines.
Annual data from the Shared National Credits Program (Office of the Comptroller of the Currency) offers valuable sector-level insights in terms of the sizes of these credit facilities, and the most recent report (1Q16) shows total bank loan commitments to commodities firms totaling $938bn. More general research by the San Francisco Fed suggests that firms draw upon roughly a third of their credit lines during periods of tight credit conditions (on average). Additionally, FDIC data show that most C&I loans are made under commitment (81% on average in 2016). Based on these considerations, a decline in credit facility usage by commodities firms – driven by a combination of voluntary repayments, collections, and defaults – would arguably be large enough to explain the current shortfall in C&I loan growth. For example, assuming the commodities sector was borrowing a third of its available loan commitments as of quarter-end 1Q16, then a 35% reduction in this balance over the remainder of the year would result in a decline in bank lending of $108bn.
In other words, you can thank the downturn in oil prices for the uptick in lending, and now, you can thank the upturn in oil prices for the downtick in lending.
Oh, the irony.