Mortgage Crisis Affecting Credit Markets

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Mortgage Crisis Affecting Credit Markets

As the crisis in the sub-prime mortgage market continues to unravel, the c-store industry is likely to see trickle-down effects similar to what the industry experienced in the late 90s -- the last time there was a major credit freeze.

"Now, the specialty mortgage lenders no longer have a market to sell off -- securitize -- their loans to bond investors due to the large and growing numbers of home mortgage defaults," said Andy Weber, founder of Corner Capital Partner LLC, an investment bank specializing in recapitalizations, capital raises and mergers and acquisitions in gasoline and convenience retailing. "The scare has spread to securitized lenders in other industries, and resulted in a large number of lenders reining in their loan advances to individual and business customers."

Weber, one of several financial experts who contribute to CSNews' Financially Speaking column, added that fortunately for this industry, there are few, if any, lenders that securitize loans made to c-store operators. However, he warns that c-stores currently in the process of refinancing or selling their company may incur higher interest rates.

"You can expect to see banks increasing their margins on their base rates. For example, spreads quoted over LIBOR (London Interbank Offered Rate) are going up, causing higher debt service for these loans," said Weber. "While this is not good news, as it could result in reduced valuations for your business, it might be worse if you are attempting to do a sale leaseback with an institution. REIT's and other real estate investors often use loans which ultimately end up in the securitization markets.

"Even more challenged will be hedge funds which rely on lines of credit and other financial engineering to leverage their investment funds. Some of them may back out of deals altogether. Make sure to ask the tough questions if you are in discussions with some entrepreneurial fund groups."

The larger overall economic impact of the sub-prime mortgage mess could be a recession, according to Carl Steidtmann, chief economist for New York-based Deloitte Research, and also a financial columnist for CSNews.

While many economists and politician avoid the "r" word, a "Japan-like recession" is at least a possibility. "Much like Japan in the early 1990s, unable to figure out just what assets are bad and which institutions are tainted, the whole system grinds on slowly working through these problems," said Steidtmann. "The result being slow to negative growth lasts for several years with home prices falling, consumer spending weak and domestic business investment in decline."

More likely, though, according to Steidtmann, are one of these two scenarios:

1. Economic Hiccup: Much like 1998, all of this gets worked out fairly quickly. We have a flurry of bank bankruptcies and workouts but the financial system absorbs these losses and the credit creation process is quickly re-established with tighter credit. The result is a short period of weak consumer spending growth, perhaps a negative GDP number for Q4 2007.

2. Traditional Recession: Much like 1990-91 with a Resolution Trust Corp. set up to help homeowners stay in the homes and banks get their balance sheets back in place. The result is 2-3 down quarters for consumer spending.

In the long run, Weber advises retailers to have faith that the capital markets will provide a solution to the sub-prime fallout. "Creative investors will find opportunities to fill the void," he said.