The junk bond market isn’t the only place to look for signs of trouble in the lending markets

Credit availability

Surging yields in the junk bond market have everyone nervous that it’s going to get a lot tougher for businesses to access financing.

For the most part, surging junk bond yields have largely been due to surging yields in the market for energy bonds, an industry that’s seen cash flow tank as oil prices crashed.

For now, many indications suggest that it is still pretty easy for businesses to borrow cheaply.

“Investors get appropriately worked up by the higher financing costs found In the junk bond world but they also need to track small business credit availability to see if the thus far contained energy sector related high yield issues are spreading,” Citi’s Tobias Levkovich writes. “Fortunately, Figure 5 illustrates that the small business pressures have not emerged and one needs to see both the high yield market and small business credit environment to worsen to drive a recession as was seen in 1989-90, 1999- 2000 and 2007-08.”

“Two per cent of owners reported that all their borrowing needs were not satisfied, a record low,” the NFIB explained. “Thirty per cent reported all credit needs met, and 57 per cent, a record high, explicitly said they did not want a loan.”

And it’s not just small businesses where lending appears to be readily available.

Slos nonbank lending proxy
UBS argued that tougher conditions in non-bank lending like junk bonds leads tighter conditions as signalled in the senior loan officers’ survey (SLOS). UBS

“In addition, the senior loan officers’ survey for business loans does not underscore the stress normally associated with an imminent recession,” Levkovich added.

Historically, however, the senior loan officers’ survey tends to follow what’s happening in the junk bond markets. In other words, while lending may be easy now, tougher lending conditions may be on the horizon.

For Levkovich, he would just say to be wary of the non-energy companies complaining about tough conditions today.

“These data points do not argue that worse credit figures are not coming down the pike, but they have not arrived yet, implying that some management teams may be crying wolf to cover up their judgment errors,” he said.