Faltering Banks Create Challenges for ARM Companies

While the economy may be showing early signs of stabilizing, the banking industry continues to worsen.  In data released late last week, federal regulators added 111 troubled banks to their endangered species list, bringing the total number to 416.  This amount is up nearly 4 fold from a year ago, despite the trillions of dollars the government has thrown at the problem.  Regulators have shut down 81 banks so far in 2009, and some analysts predict hundreds more banks will be added to the list before it is all done.   

What does this mean for many companies in the ARM industry who service bank clients or rely on bank financing for operating capital or expansion?   

The most immediate effect will be continued difficulty in obtaining financing.  The effects of this credit crunch on the U.S. ARM industry are widespread and will continue well into 2010. Georgia, California, Illinois, and Florida have been hit the hardest, accounting for 50 percent of the bank failures since 2008.  

Local banks, once a safe and reliable capital resource for many small and mid-size companies, have tightened their lending requirements to a point where it is virtually impossible for companies to borrow to finance operations or growth.  As a result, those companies that rely on bank financing are adjusting their business development strategies in the short term or seeking alternative funding sources ranging from friends, family, and high net-worth individuals to venture capital, private equity and strategic partners.  Those companies that planned ahead and are well capitalized are staying the course, negotiating good deals and capitalizing on the expansion opportunities they see in today’s dynamic market.   

There are other ramifications to keep in mind as bank failures increase:

• Short-Term Increases in Consumer and Commercial Loan Defaults – Without access to additional financing, default rates among consumer and commercial borrowers will continue to rise, continuing to increase placement volumes and challenge recovery efforts.

• Placements Will Decrease in the Future – Placement levels in select asset classes will level off and possibly drop over time as some credit card issuers and lenders curtail their lending.

• Portfolio Prices May Decline Further – With limited financing options and concerns about future performance, pricing for many portfolio sales will remain at current levels and possibly decrease, resulting in less auctions and more one-off negotiated transactions or no-trades.

• More Distressed ARM Situations Will Occur – Capital constraints and poor performance will force some companies to break loan covenants, resulting in more distressed M&A transactions and some bankruptcies.

• Local Banks Will Merge – Another round of consolidation among local and regional banks will occur.  

For those ARM companies that operate in the financial services market, some of these challenges are creating opportunities that are being capitalized upon.  However, none of us are immune and all ARM companies should monitor the situation, as we will likely feel the impact of changes in the banking industry for some time to come.