Raising Credit Facilities as Rates are in Flux

Abstract: The panel discussion on “Raising Credit Facilities as Rates are in Flux” explored the challenges and strategies lenders face amidst fluctuating interest rates. Rising rates have compressed margins, increased delinquencies, and prompted lenders to focus on long-term relationships and higher-margin businesses. Specialty finance segments saw surprising delinquencies in prime borrowers, while subprime performed as expected. Managing repayment schedules requires balancing duration risk and prioritizing margin sustainability over volume. To navigate net interest margin compression, lenders are adopting shorter-term assets, tiered pricing, and cost-sharing with merchants. Private credit remains pivotal, offering growth opportunities despite higher costs and cross-border complexities. Panelists advised borrowers to focus on transparency, realistic growth, and proactive engagement with lenders. Hedging for variable rates was deemed unnecessary by some, who instead emphasized flexible facilities and robust credit parameters. The session highlighted the importance of adaptability and collaboration in a volatile financial landscape.  👉 Check out the full video here.   👀  

How have rate fluctuations impacted your lending strategy?

Lauren: When providing credit facilities, we focus on long-term relationships and the viability of underlying businesses. Over the past year and a half, rising rates have compressed margins for many small businesses, impacting cash flow and business viability. Delinquencies and defaults in portfolios have also increased, prompting us to move away from lower-margin businesses toward those with stronger long-term potential. While rate cuts might expand margins, we’re still cautious about consumer delinquencies, as the lag effect from inflation and unemployment persists.

Are you seeing specific trends within specialty finance segments?

Lauren: Subprime performed as expected, but the prime segment had surprising delinquencies, likely due to inflated credit scores during COVID. As rates normalize, we’ll see how this trend evolves, but we’re monitoring closely.

How do you manage uncertain repayment timelines in volatile environments?

Mickey: Duration risk is always top of mind since repayments depend on settlement timelines. Managing spreads is crucial. In low-rate environments, competition increases, but rate hikes can lead to delinquency issues. We prioritize margin sustainability over volume, ensuring we’re comfortable with origination quality. Flexibility in structuring facilities also helps us mitigate risks.

Net interest margin (NIM) compression has been a challenge. How have you navigated this?

Lauren: We’ve shifted toward shorter-term assets to reduce duration risk, implementing bespoke facilities with tiered pricing to align with business performance.

Ryan: We’ve diversified our portfolio, leveraging data analytics to optimize pricing strategies. Collaborating with merchants to share costs has been another approach.

Mickey: We accept some origination trade-offs for better spreads, avoiding high-risk fixed-rate lending funded by floating-rate borrowing.

Private credit is gaining attention, particularly in the U.S. How has this impacted your businesses?

Ryan: Private credit played a vital role in our early days, despite its higher costs. It allowed us to scale and test our model. As we expand into the U.S. and Canada, we’re seeing increased competition among private credit groups, offering more favorable terms.

Lauren: Private credit is critical for growth, especially when scaling early-stage businesses. However, cross-border complexities and currency hedging add challenges. Despite fewer private credit players in Canada compared to the U.S., they remain an essential part of the financing ecosystem.

What advice would you give borrowers looking to secure a facility today?

Ryan: Find great advisors who can advocate for you and build trust with lenders. Start conversations early and be proactive about aligning your vision with lender expectations.

Lauren: Focus on realistic growth objectives and address challenges head-on. Banks appreciate transparency about market understanding and risk management.

Mickey: Stay mindful of NIM and avoid unsustainable growth or underpriced risk. Borrowers should ensure facilities align with their business needs and ask for favorable terms proactively.

How do you approach hedging for variable interest rates and duration risk?

Mickey: We don’t require hedging, as it would add unnecessary costs. Instead, we manage duration risk through shorter-term facilities and strong credit parameters.

Lauren: While hedging isn’t mandatory, we’ve shifted to shorter-term assets to avoid volatility. For longer-term financing, ensuring adequate margins is essential.

Akash: Thank you to our panelists and audience for a fantastic discussion. If there are no further questions, we’ll conclude. Have a great day, and thank you to the CLA for hosting our panel!  👉 Check out the full video here.   👀  

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