Nashville Noncurrent Loans At A Post-Recession Low
December 3, 2014 – Earlier this week, the Nashville Post reported that banks in Middle Tennessee had hit a post-recession low in noncurrent loans. Naturally, with bad loans down, profits are up dramatically, and new lending is up. Let me make a few quick observations about this.
The first observation is that the numbers being reported match up with what we have been seeing in the marketplace. On the bad loan side of the ledger, most any business insolvency lawyer in town will tell you that there just haven’t been very many workouts lately. For a few years now, work has been slow for most of the business bankruptcy lawyers in Nashville, or they have been focusing on secondary practice areas like deals or litigation.
Barring a surprise shock to the economy (like war or a major terrorism event), I would expect that the bad loans numbers will stay low for a few years, at least. While lending is up now, banks have been pretty conservative since they finally started lending again in 2011 and 2012. My sense is that real competition among banks to get new business has only gotten going again in the last year or so. My theory is that competition among bankers will tend to cause some bankers to make loans that maybe won’t be that great in the long run. We’ll need a few years, at least, for the competition of today to blossom into the bad loans of tomorrow.
The second observation is that I may soon have a long-standing hypothesis tested. Back in 2009, when there were almost no new business bankruptcy cases in Nashville other than liquidations, I claimed that the economy was so bad that it wasn’t worth filing a business reorganization case. Things were so bad that there was no reasonable way to disagree over a bankruptcy exit strategy. Instead, bankers, investors, managers and creditors pretty quickly figured out whether a company should just die, or whether the bank was going to “extend and pretend” that the company could pay the debt at a later date. It was clear then that it was going to take multiple years for the banks to clean up all of the loans that weren’t good any more.
The corollary to the 2009 theory was that, once lending really got going again (which has taken until now), there would be an increase in business bankruptcy cases as those companies that survived the downturn pretty well began to gobble up those that barely survived the recession. I think we are definitely in the process of seeing the strong start to gobble up the weak. I’d argue that a bunch of the new lending noted by the Post is being used for that purpose. And, certainly, more private equity money is coming off the sidelines. Over the next year, I’ll find out whether my 2009 prediction that a return to healthy lending would also mean an increase in business bankruptcy filings comes true.