Robert P. RinekManaging Director, Piper Jaffray & Co.
Monitor:Is this liquidity crunch different from others?
Robert Rinek: It’s hard to know, because we haven’t seen the full impact of the credit cycle being played out. The magnitude of the problem will be directly correlated to the ripple effect from the subprime mess; what I mean by this is the following: will problem mortgages spread to the auto paper area and then to the credit card industry? What is the reach of the problem credit cycle? No one knows for sure.
M:What’s happened to securitization?
RR: The market has dried up. Buyers don’t perceive a liquid market, thinking that if they needed to get out, they couldn’t. Hence, the buyers have gone away. I suspect the bigger issue is a loss of confidence and trust with the major players involved in the process: the investment banks, rating agencies and financial guarantors.
M:Are other funding methods still available? If so, how expensive is capital becoming?
RR: Hedge funds are there, but they’re very costly. The only alternative is to call your main bank. Unfortunately, the banks are very cautious right now. They have the Fed making more liquidity in the system to encourage them to lend, but the bank examiners are telling them to be more discerning in providing credit. The end result is a state of gridlock.
M:What will the fallout look like?
RR: There will be the haves and the have-nots. The have-nots will have to find someone to buy them. They’ll either get bought as a portfolio sale with little premium or, if they’re lucky, as a going concern with a greater premium for franchise value. It used to be that the well-capitalized institutions were easy to name. Now it’s not as clear. When institutions like Merrill Lynch and Citibank need to visit the Sovereign Equity Funds to get their capital, you know that things are a little upside down.
M:Who will have the advantage in the fallout?
RR: I think the strong, regional banks that haven’t ventured too far from home and have a true core focus will probably do the best. Also GE Capital and the large captives like John Deere Credit, IBM Global Finance and Textron Financial will do very well. Some of the smaller independents are being creative and starting industrial banks to diversify their funding options.
M:How can companies access funds in the meantime?
RR: They’ve got to be very creative and/or have long-term relationships to fall back on. Outside of these thoughts, there are hedge funds, angel funds and private equity funds. The best advice that I can give you is to hunker down. The time of “easy money” has come and gone. It would be best to find a good bank to build a long-term relationship and then grow your balance sheet in a thoughtful way.
M:How long will this drought last — and how will we know when it’s over?
RR: I’ve heard people say we’re in the fourth inning of a nine-inning game; I’ve heard others say we’re in the seventh inning. We really don’t know and will not until this credit cycle runs its course. My sense is that we have a good 18 months to go before we turn the corner. I think we will know that things are getting better when the larger financial institutions start having consecutive quarters of earnings announcements without surprises. In the meantime, don’t lose your sense of humor, and keep the faith.
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