Do you remember when commercial banking was all about knowing your client and
your clients’ industry and having strong relationships and parking billions
of dollars in loans in some dusty old part of the balance sheet which never
got marked to market or even really looked at? Neither do I, frankly. But today
I had a fascinating meeting with Tom Quindlen, the president and CEO of GE
Corporate Lending, who almost took me back to those halcyon days.
GE, it turns out, has a corporate lending department which is on track to lend
a lot of money this year – $20 billion – and even more
next year. It’s buried three levels down in the corporate hierarchy (it’s part
of Corporate Financial Services, which is part of GE Commercial Finance) and
it’s full of people who know their industry (steel, retail, timber, you name
it), and it’s been a major player in some very large syndicated loans, such
as the $1.9 billion debtor-in-possession facility for Delta Airlines and a $1.5
billion loan for Saudi chemicals company Sabic.
GE has a very old-fashioned attitude towards risk management: basically, it
involves GE lenders doing a lot of legwork before committing any capital, and
then trusting their own judgment. If GE underwrites a loan with the intention
of syndicating it out, then it will obviously keep an eye on the market value
of that debt – but if it’s going to keep the loan itself, it doesn’t mark
to market. GE also is very conservative: it deals only with senior secured loans,
which are the least likely to default.
There seems to be very little attempt to look at the bigger picture within
the GE Corporate Lending department. Talking to Quindlen, it sounds as though
his group is very strong on the bottom-up analysis of its portfolio companies,
but doesn’t spend much time on top-down analysis of where the US or global economy
might be headed, or even where the credit markets are going. Quindlen’s department’s
lending goals didn’t change at all during or after the credit crunch of July
and August, and they’re going to increase in 2008 no matter what happens to
the US economy. If spreads gap out, so much the better for him: it just means
more profits on the loans, especially since GE’s funding costs, given that it’s
a AAA-rated company, are extremely low. The fact that he might lose money on
his current portfolio if he had to liquidate it is irrelevant, since that will
never happen, and he holds loans to maturity (or to bankruptcy, in which case
GE can help with restructuring).
GE, then, is a very old-fashioned lending shop, with no prop desk and no real
way to hedge positions or to make a bet on spreads widening. But it’s solid,
and profitable, and creditworthy. And those are things in short supply these
days.