Commercial Loans Blog

Commercial Loans and Credit Companies

Posted by George Blackburne on Mon, Sep 30, 2013

Historically credit companies were a major source of commercial loans.  The big credit companies - commercial real estate lenders like GE Capital and CIT Financial - are fairly quiet right now, but mark my words.  If you believe in capitalism, these credit companies should be coming back in the market very aggressively before long.

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What is a credit company?  A credit company is an old, well-capitalized lending company with an excellent reputation for borrowing, lending, and repaying its unsecured bond holders.  The following credit companies no longer exist in their most recognized form, but they were once household names:  Beneficial Finance, Ford Motor Credit, and Household Finance.

bankA credit company has a such a superb repuation for managing credit that it can walk up to the bond market and simply shout out, "Who wants to loan us money on an unsecured basis?  Okay, okay, just line up here please.  No pushing.  No shoving.  Okay, what interest rate do you want?  Three percent?  You're dreaming.  Step out of line please.  What interest rate do you want?  You'll loan us money at 1.50%?  Okay, that works.  Please give your dough to the clerk.  Who's next?  No pushing.  No shoving!"

So a credit company might be able to borrow money in a market like today at just 1.25% to 1.75% and then lend it out at a whopping 5% to 7%.

Many of the largest credit companies took a terrible beating during the Great Recession.  In September of 2008, during the darkest days of the slump, money market funds were facing massive withdrawals.  Even well-run companies, like GE Capital and CIT, were having trouble rolling over their commercial paper.  Commercial paper is defined as an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

Ben Bernanke, the Chairman of the Federal Reserve and my personal hero, saved the day by guaranteeing the deposits of money market funds.  Investors stopped withdrawing funds, the run on the money market funds ended, and the money market funds went back to buying commercial paper and short-term corporate bonds.

However, most credit companies were sorely wounded during near-collapse of the corporate bond market, and they have largely withdrawn from active participation in commercial real estate lending in recent years.  But I'm a betting man, and I am betting on capitalism.  They will soon be back.  Why?

Last year was the best year in the 33-year history of Blackburne & Sons.  My private money commercial mortgage company faced very little competition for commercial loans.  Bank-quality borrowers and near-bank-quality borrowers were forced to pay our soft-money rates if they wanted to take advantage of a discounted pay-off ("DPO") from their bank.  The same thing was true of commercial mortgage borrowers with balloon payments coming due.  Where else could they go?  As a result, Blackburne & Sons had a very good year.  We made good money, and we booked some terrific loans too.

However, it is a basic tenet of capitalism that "excess profits breeds competition."  You can absolutely bet that all across Wall Street and the board rooms of credit companies, capitalists are rubbing their hands together and saying, "There's gold in them 'thar hills!  It's time to get back into commercial real estate lending."

This is how a commercial mortgage market recovers.  There is a certain order to things.  First the private money lenders - who use the funds of very wealthy private investors with a large tolerance for risk - return to the market.  They make a big profit.  This attracts the credit companies and the finance companies.  A finance company is a company which borrows money from a commercial bank at a low rate then lends it out a higher rate.  The credit companies and the finance companies then make the big profits.

Eventually the regional banks and the community banks see the big profits being made by the credit companies and the finance companies, and then they return to the market.

Is this absolutely sure to happen?  As Mark Twain once said, “History doesn't repeat itself, but it does rhyme.”

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Topics: credit companies