Rubenstein: No $10 Billion L.B.O.’s Anytime Soon

While David M. Rubenstein thinks happy days for private equity are coming again, he says one shouldn’t bet on seeing the mega-buyouts of yesteryear return anytime soon.

Mr. Rubenstein, the Carlyle Group founder, told Bloomberg Television in an interview on Thursday that many of the elements are in place for a recovery in the leveraged buyout industry. But the big deals from the golden age remain highly unlikely: “If you want to do a $10 or a $20 billion buyout, I think that’s unrealistic in this day and age right now.”

Watch a video of the interview:

Mr. Rubenstein said that private equity firms are benefiting from the re-opening of the debt gates, giving him and his competitors access to the financing they need to do deals again. Companies are more willing to consider deals at more seller-palatable prices, too.

Still, some aspects of private equity deal-making remain harder. Debt remains more expensive than before and carries more covenants, or restrictions. And private equity firms are forced to increase the amount of equity they will put into an L.B.O.

NY Times

DDIFO Editors Note: The Carlyle Group, is one of three private equity groups that own Dunkin’ Brands.

SBA Loan Breaks to go Away until Senate Acts

Kent Hoover of Biz Journals writes at MSN Money that government guaranteesthe b and reduced fees that revived U.S. Small Business Administration lending are going away again, at least for a while.

The economic stimulus bill increased the SBA’s guarantee on its flagship 7(a) loans from the usual 75 percent to 90 percent, and reduced or eliminated fees on both 7(a) loans and 504 loans, which are used primarily to finance real estate. These enhancements made SBA loans less risky for lenders and less expensive for borrowers.

That’s a big reason the dollar volume of 7(a) loans this fiscal year, which began Oct. 1, is up by 87 percent from the same period a year earlier. Lending through the 504 program is up 43 percent.

On Nov. 23, the SBA ran out of the $375 million in stimulus funds that made the higher guarantee and fee reductions possible. Congress restored these enhancements Dec. 21 with $125 million in additional funding, but that money was expected to last only until Feb. 28.

In recent weeks, SBA lenders have rushed to submit their loan applications to the agency before the money ran out. The scramble accelerated Feb. 11 when Senate Majority Leader Harry Reid, D-Nev., stripped funds for another extension of the SBA loan enhancements — along with many other unrelated provisions — from the jobs bill scheduled for Senate action Feb. 22.

With the funds for the breaks running out, the SBA likely will set up a waiting list for lenders who want to get the higher guarantee and fee reductions for their loans. These loans will be processed if and when Congress makes additional funding available. More than 1,000 loans were sitting in a similar queue in December, when Congress passed its last SBA extension.

SBA lenders and small-business groups were surprised and frustrated by Reid’s decision to delay another SBA loan extension.

“We thought this was a done deal,” said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders. “Everybody was on the same page.”

President Barack Obama had endorsed extending the SBA loan enhancements through the end of the year, which would have cost $354 million. The House passed the extension in December.

“This is not something that can really wait,” said Todd McCracken, president of the National Small Business Association. “It’s really important to get this resolved for the year.”

The on-again, off-again nature of these SBA lending incentives hurts efforts “to really strengthen the program and make it effective for small businesses in the long term,” he said.

SBA lending (October through January)

7(a) loans

• FY 2008: 26,660 loans totaling $4.1BFY 2009: 11,477 loans totaling $2.4BFY 2010: 15,504 loans totaling $4.5B
  504 loans
• FY 2008: 3,049 loans totaling $1.8BFY 2009: 1,693 loans totaling $1.0BFY 2010: 2,562 loans totaling $1.5B
  Source: Small Business Administration.

 Read more at: MSN Money

Danvers Bancorp Cranks up Loan Spigots as Larger Rivals Retrench

Tim McLaughlin of the Boston Business Journal writes that about eight months before Lehman Brothers collapsed in the fall of 2008, Danvers Bancorp Inc. reeled in about $175 million in capital from its conversion to a publicly traded bank from a mutual.

The capital windfall’s timing could not have been better. The big banks that dominate commercial lending in Boston — Bank of America Corp., Sovereign Bank and Citizens Bank — soon became distracted by massive credit losses amid an economic recession that whipsawed their capital and confidence.

Danversbank, meanwhile, pounced.

The bank cranked up commercial lending under the direction of Chief Executive Kevin Bottomley. He later outmaneuvered rivals, including a well-heeled private equity fund, to land Beverly National Corp., parent company of a neighboring community bank.

While big banks retrenched, the assets at Bottomley’s bank in 2009 surged 45 percent to $2.5 billion from loan growth and the Beverly acquisition. When Bottomley became the top executive of Danvers Savings, the precursor to Danversbank, in the mid-1990s, assets were about one-tenth today’s size.

But Danversbank isn’t done expanding.

“Our ambition is to grow the bank,” Bottomley said during a recent interview.

The son of an insurance agency executive, Bottomley, 57, grew up in the Auburndale section of Newton. He went to Harvard College and graduated with a history degree in 1974.

“I was unemployable when I graduated,” he said.

After Harvard, he went to the University of Virginia to get an MBA. He arrived not knowing a debit from a credit, but he survived and landed in Bankers Trust’s training program in New York.

His first assignment was on the Japan desk. He took loans through committee in New York and drummed up business calling on Japanese manufacturers based in the United States. Larry Fish, who later became Citizens Bank chairman, was branch manager in Tokyo.

After about five years of traveling, Bottomley was eager to get back to Boston. His wife’s family is from Danvers.

BankBoston, which had strong connections in Latin America, hired Bottomley for his Asia Pacific experience. Bottomley later went to London at the strong suggestion of Chad Gifford, who sold BankBoston to archnemesis Fleet Financial in 1999.

London turned out to be a great gig for Bottomley. Margaret Thatcher was prime minister and the dollar was strong. Bottomley soaked up the local sports scene, attending Chelsea football matches. He still remembers how standing-room crowds shook the stadium like an earthquake.

In 1989, Bottomley left BankBoston to become the top lender at Boston Private Bank and Trust, where he worked for several years.

“He did a great job,” said Boston Private Financial Holdings Inc. CEO Tim Vaill, who was Bottomley’s boss before he left for Danvers Savings.

Bottomley got his chance to run the show when the board at Danvers Savings wanted someone to boost commercial lending aggressively. The bank’s CEO at the time, James Zafris, laid the foundation by making the bank a top Small Business Administration lender.

“We diversified the earnings base by creating a commercial bank within a traditional savings bank,” Zafris said during a recent telephone interview.

Bottomley said the bank’s board was ready to grow even more when he arrived.

“A lot of mutual banks want to stay in their hometown and stay in the contiguous communities,” Bottomley said. “I didn’t have to do a lot of pushing and prodding to get them to expand.”

Boston Business Journal

Save BIG and Boost Cash Flow with Cost Segregation

With tax season upon us, Dunkin’ Donuts franchise owners might be interested to know about noteworthy tax-saving strategies. Enter: cost segregation which, depending largely on the scope of a franchisee’s holdings and investments, can yield upwards of $1 million in additional tax deductions.

“Cost segregation studies can benefit franchisees in many ways,” according to CPA Jim Ventriglia. “By accelerating depreciation, it has the effect of lowering the taxable income of property owners, and lower tax liabilities can provide additional cash flow. Cost segregation can work even if you’re a tenant. I encourage clients to explore the benefits. In every instance we have done so, the benefits far outweighed the expense involved.”

J&M Batista Limited Family Partnership, a real estate company involved in developing multiple Dunkin’ Donuts locations, became aware of the remarkable potential benefits and enlisted the services of Bedford Cost Segregation (Bedford), a DDIFO Sponsor. The principals of J&M Batista, along with their affiliates, have developed more than 50 Dunkin’ Donuts locations in Massachusetts, Ohio, New York and Florida. John Batista, founder of J&M Batista, took over the very first franchised Dunkin’ Donuts shop more than 30 years ago and continues to operate that location, which recently underwent a major remodel.

The leadership at J&M Batista engaged Bedford to perform cost segregation studies on six of its Worcester area buildings. While the properties were built between 2002 and 2008, IRS guidelines and tax law allow for retroactive studies that will yield tax benefits in the current year. With the help of J&M Batista’s Director of Construction and Dunkin’ Donuts Franchisee Matt Doyle, Bedford engineers went to work to document the value of specialty components—including select electrical, plumbing, HVAC, millwork, finishes and many outdoor components—eligible for accelerated depreciation (5-year or 15-year rather than 39-year). This resulted in much higher depreciation deductions as well as critical information for the write-down of certain assets when these properties are remodeled in the future. Bedford worked closely with Doyle and with J&M Batista’s CPA to ensure that every tax benefit was realized.

“We feel that 39 years is too long to wait to recoup our investments, and cost segregation is proving to be a great tool to expedite that recovery,” said J&M Batista President and Dunkin’ Donuts Franchisee Rob Branca. “Plus the additional cash flow derived from Bedford’s studies will serve to fuel our growth and remodels without having to go to the bank to borrow.”

The studies generated an increased depreciation deduction of more than $1 million in tax year 2009. In addition to this tremendous year-one benefit, J&M Batista will realize another $400,000 in depreciation over the next four years. Bedford has worked with several other Dunkin’ Donuts-related organizations and has experienced similar success. J&M Batista was so pleased with the return on the initial six studies that the organization has further engaged Bedford to perform studies on several other properties.

“We’re proud to have been selected by J&M Batista to provide this service and are thrilled that it’s worked out so well for them,” said Bedford Director of Business Development Bill Cusato. “We are also excited about our track record with the Dunkin’ Donuts community and encourage franchise owners and operators to contact us to evaluate how we can help them as well.”

Bedford has emerged among the nation’s leading and most experienced providers of engineering-based cost segregation services, having completed more than 5,000 studies throughout the country. The company’s team includes engineers, architects and construction professionals along with tax experts and business development consultants. Bedford’s property reports are second to none, employing a detailed engineering approach and conforming to the highest standards established by the IRS.

There are many times during the life of a property when cost segregation can add value. Basically, if you have bought, built or made significant capital improvements to a building within the last six to eight years, chances are you could benefit from a study.

“Since 9/11, the government has enacted a number of incentive programs to encourage business owners to invest in their operations by helping them to write-off those costs more quickly,” said Cusato. “Cost segregation is a tool that often helps to unlock much of that value by triggering those incentives and, consequently, is a tremendous way for franchisees to sustain and grow their businesses.”

For more information on how cost segregation can help you achieve considerable tax savings and increase your cash flow, contact Bill Cusato at bcusato@bedfordcostseg.com or 978-263-5055. You can also learn more at www.bedfordcostseg.com.

Citizens’ pain: A $600M loss

A unit of Citizens Financial Group recently reported a full-year net loss of $600.4 million for 2009 after charging off more than $2 billion in bad loans.

RBS Citizens, the No. 2 retail bank in Massachusetts, disclosed the loss in a financial report filed with the Federal Deposit Insurance Corp. The bank was not available to comment for this story.

With about $117 billion in assets, RBS Citizens accounts for most of the operations under the umbrella of Citizens Financial Group, a Providence, R.I.-based holding company with about $151 billion in total assets. Citizens Financial is owned by Royal Bank of Scotland Group plc, which also owns CharterOne Bank in the Midwest.

RBS Citizens set aside nearly $2.5 billion for anticipated loan losses in 2009. And during the year, the unit charged off $2.2 billion in bad loans. The bank has been hit hard by soured residential mortgages and commercial loans, FDIC filing show.

Deposits at RBS Citizens totaled $72.8 billion at the end of 2009. That compared with $74.2 billion at the end of the third quarter, FDIC filings show.

Obama: Small Business Key for Recovery

President Obama puts economy, small businesses, and job creation at the center of his State of the Union address.

Kent Bernhard, Jr writes at Portfolio.com that faced with a national 10 percent unemployment rate and a corresponding erosion in his popularity, President Obama delivered his first State of the Union address tonight and offered up a laundry list of proposals aimed directly at the small businesses who do 60 percent of the hiring in America.

The president proposed eliminating all capital-gains taxes on small-business investment, creating tax incentives for small businesses to hire new workers and raise the wages of those they already employ, and steering $30 billion in money from the Wall Street bailout to community banks to lend to small businesses. In all, two thirds of the speech was devoted to the economy.

“Now, the true engine of job creation in this country will always be America’s businesses. But government can create the conditions necessary for businesses to expand and hire more workers,” Obama said. “We should start where most new jobs do—in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides its time she became her own boss.”

Just over a year into his presidency and less than a week before submitting his fiscal 2011 budget proposal, Obama proposed creating a task force of advisers to look for ways to reduce the nearly $1.4 trillion budget deficit. He also promised to freeze some discretionary spending for the next three years—a nod to those who have become more concerned in recent months about increased federal deficit spending. And he called on Congress to be more transparent about the money members add to the budget for pet projects—called earmarks.

“Rather than fight the same tired battles that have dominated Washington for decades, it’s time for something new. Let’s try common sense. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the people who sent us here,” he said. “I’m also calling on Congress to continue down the path of earmark reform. You have trimmed some of this spending and embraced some meaningful change. But restoring the public trust demands more. For example, some members of Congress post some earmark requests online. Tonight, I’m calling on Congress to publish all earmark requests on a single website before there’s a vote so that the American people can see how their money is being spent.”

That pledge, however, isn’t stopping Obama from saying he hopes to invest in clean energy, an effort the White House says will create not only new small businesses and more jobs but also a bigger wave of innovation. Among his promises: renewed support for efforts to place a cap on carbon emissions and creation of a program to offer homeowners incentives to retrofit their homes to be more energy efficient.

“We should put more Americans to work building clean-energy facilities and give rebates to Americans who make their homes more energy efficient, which supports clean-energy jobs. And to encourage these and other businesses to stay within our borders, it’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America,” he said.

He added that incentives also have to be part of that picture, and hard choices, like one that would put a cost on greenhouse-gas emissions caused by burning coal, oil, and natural gas. Such a bill has passed the house but is stalled in the Senate.

“To create more of these clean-energy jobs, we need more production, more efficiency, more incentives,” he said. “That means building a new generation of safe, clean nuclear power plants in this country. It means making tough decisions about opening new offshore areas for oil and gas development. It means continued investment in advanced biofuels and clean-coal technologies. And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.”

For the long term, he also reiterated his call for financial reform, aimed at lessening risk and giving consumers more information.

“The House has already passed financial reform with many of these changes. And the lobbyists are already trying to kill it. Well, we cannot let them win this fight,” he said.

As with any State of the Union—the near-annual speech a sitting president gives to a joint session of Congress—Obama’s address served as a blueprint for where he wants to take his presidency for the coming year. And like with the speeches of his predecessors, Obama doesn’t skimp when it comes to making promises and proposals:
•He focused on making export deals, another area in which he hopes he can juice small-business hiring.
•He said he plans to steer more money to small banks to lend to small businesses. Plus, he reiterated his call for greater regulation of the entire financial system and for curbs on allowing banks to grow too big to fail.
•He called on Congress to pass a law reversing the recent Supreme Court ruling that “reversed a century of law to open the floodgates for special interests—including foreign companies—to spend without limit in our elections. Well, I don’t think American elections should be bankrolled by America’s most powerful interests, and worse, by foreign entities.”
•He’s proposing the hiring tax credit for more than 1 million small businesses.
•He’s aiming to double U.S. exports by pursuing a round of trade negotiations and strengthening ties with partners like South Korea, Colombia, and Panama.
•And finally, the president renewed his call for comprehensive health care reform, his signature issue. But he wants to reframe the issue, making the case that without such reform, the cost of health care drags down businesses’ ability to expand or create new jobs.

Obama made his case while his fellow Democrats still hold a majority in both houses of Congress, but he did so in a significantly changed political landscape ever since Massachusetts voters elected Republican Scott Brown to take the traditionally Democratic Senate seat that belonged to Ted Kennedy before his death.

That election deprived Obama of a 60-vote, filibuster-proof majority in the Senate, and that means the president will have to find a way to work with Republicans, not just on health care but on the other proposals he makes tonight.

 Read more at: Portfolio.com

Landlords to Restaurant Chains: Let’s Make a Deal

David Farkas of Chain Leader reports the recession has turned the tables on landlords, who are now offering restaurant chains attractive rents and more.
 
Pizza Inn, an aging chain in a crowded category, says the chain is nonetheless attracting more tenant improvement dollars than ever, says Vice President of Franchising Madison Jobe.
 
This past year, mall landlords gave Häagen-Dazs build-out extensions for the first time, saving the ice-cream chain tens of thousands of dollars.
 
Kevin Kruse, vice president of franchise development for Einstein Noah Restaurant Group, claims he’s hasn’t seen “this many high quality sites in a very, very long time.” 

Had more landlords been willing to work with Chili’s Grill & Bar in the 1980s, the casual-dining chain might have opened a lot more restaurants. But developers sometimes balked at Chili’s loudly striped awnings, a crucial brand element.

“We killed many deals if they wanted us to have their awning,” recalls Clark Knippers, then vice president of real estate and development for Chili’s parent company Brinker International.

Until recently, landlords have had no problem asking for—and often getting—their awningsor whatever else they wanted in leasehold agreements. Competition for good sites was fierce among fast-growing restaurants and retailers, which typically acceded to landlords’ demands.

Not anymore. “Supply and demand has flipped; now it’s a tenants’ market,” says Knippers, founder and president of Dallas-based Foremark, a consultancy specializing in restaurant real estate.

Space Available

Blame the poor economy, which is tanking businesses and freeing up loads of commercial space at attractive prices. Spring ReCount data from market research firm NPD Group show the U.S. total restaurant count slipped 0.6 percent in 2008, to 570,980. Experts believe that percentage is sure to climb when new data are out later this month. “I definitely think there is reason to believe so given persistently weak industry sales trends,” offers restaurant analyst Mark Kalinowski of Janney Montgomery Scott.

Excess capacity means lower rents, already down 10 percent on average nationally, according to Jones Lang LaSalle. They will tumble another 5 to 7 percent this year, especially in secondary markets, notes a report from the Chicago-based real-estate services firm. “Rent declines in the most construction-heavy markets like Atlanta, Charlotte and Miami will approach double digits in the first half of [2010],” the report adds. The firm doesn’t expect rents to begin rising until well into 2011.

And a fall survey of property owners by National Real Estate Investor, a trade publication, showed that 52 percent expected effective rents to decrease for the next 12 months compared to 38 percent who projected declines three months earlier.

The upside for restaurant chains, especially growth-oriented chains, is deals galore. Lease terms (including mid-lease) have changed dramatically over the last 12 months.

“We are getting real-estate deals we’ve never gotten before,” declares Larry Feldman, CEO of Subway Development Corp. of Washington, sub-franchisor of more than 1,000 sandwich shops in the mid-Atlantic region. “Landlords are splitting space and cutting rents.”

In one case, a landlord is charging Feldman half the rent he would have paid two years ago in a rehabbed food court in Washington, D.C. In another, a Georgetown, Md., developer divided a shuttered Blockbuster, offering Feldman’s franchisee 3,500 square feet—a deal Feldman claims never would have happened two years ago. “We walk into a landlord, and now we’re on top,” he says.

Rent Relief

Perhaps the most remarked-upon change in lease structures has been landlords’ willingness to grant rent relief mid-lease, a practice all but unheard of until recently.

“I have never seen anything like this,” says Madison Jobe, vice president of development for Dallas-based, 315-unit Pizza Inn, referring to rent restructuring. “I have never experienced anything like what we are going through now, nor have any colleagues I’ve talked to.”

“Rent relief is part of the reason occupancy is where it is today,” Taubman Centers CEO Robert Taubman told investors in the company’s third-quarter 2009 conference call. Occupancy had slipped just 1.4 percent in the prior 12 months at the 25 malls the Bloomfield Hills, Mich.-based company operates. Tenant sales per square foot, however, tumbled nearly 12 percent, to $497 per square foot.

Taubman was mum on how many tenants have received abatement. “We would prefer not to be specific about the absolute number of rent relief cases,” he said.

Rents won’t rise (or even stabilize) until more consumers renew their love affair with meals away from home. That’s unlikely until the second half of the year, when NPD Group predicts traffic will turn slightly positive. It likely won’t spark new building. The International Franchise Association forecasts new-unit growth of just 2 percent among franchised businesses overall, well below the 5 percent average annual increase from 2001 to 2008.

As a result, many landlords will remain on the hunt for tenants as well as working to keep those they now have. “The dynamics have turned around so much that my e-mail is going crazy with landlords asking, ‘What it will take to get you to stay in our center,’” says Sam Osborne, an area developer for Destin, Fla.-based Tropical Smoothie Café who has opened 20 locations in Central Florida.

For instance, Osborne recently helped renegotiate a lease, saving a franchisee $1,000 a month, or about $20,000 on the remainder of the lease. He says he told the landlord the franchisee wanted to stay but was exploring options. Osborne then asked the landlord “to work with us.”

Read more at Chain Leader

The Mysterious Case of the Missing $3 Trillion

The New Risk: Securitization

Suzanne McGee  writes at Portfolio.com that the financial crisis has changed the way people think about risk. At the end of every three-month period, data providers crunch through a mountain of information about stock and bond deals, M&A activity, and all kinds of other financing to produce the much-scrutinized “league tables.” And the final weeks of December were no exception, as Jody Drulard and his team at Dealogic LLC scrambled to put together a summary of Wall Street’s dealmaking for the watershed year of 2009.

But instead of looking at what Wall Street firms had done in 2009 (notably, a big rebound in debt issuance that earned $18.2 billion in fees for investment banks and banks globally), Drulard found himself pondering what wasn’t showing up on the league tables he was compiling. Specifically, that missing $3 trillion or so of capital that Wall Street had raised every year for most of the first decade of the 21st century.

“Really, what’s happened is that about 25 percent of the capital markets fundraising activity has just evaporated,” says Drulard, managing director of Dealogic. “The securitization market had $2 trillion of capital raised every year for six years or so; another $1 trillion once raised in the loan market is gone as well. If that’s the ‘new normal,’ that’s got to be worrying for Wall Street.”

Folks like Reed Auerbach, head of the structured transactions group at the law firm Bingham McCutchen, are already feeling the impact. Back in 2006, at the peak of the market, partners and associates at McKee Nelson (the predecessor firm, of which Auerbach was co-CEO) were toiling away to put together three or four securitizations or more every working day. “It was like a machine,” Auerbach says. Last year? Bingham McCutchen, which merged with McKee Nelson last year, is still No. 1 in terms of the number of securitization deals it helped put together. But it worked on only 114 transactions in 2009, down from 1,100 or so in 2006.

To some extent, the ebullient bond market masked some of the pain for financial institutions last year, as companies raced to take advantage of relatively low rates and rapidly recovering investor interest to issue a record $2.78 trillion. Even junk-bond issuance soared to $175.6 billion, triple 2008 levels and within 10 percent of the 2006 issuance record. And Drulard figures that underwriting new debt and stock issues will continue to keep Wall Street’s bankers busy in 2010. “But securitization and lending have been very important products; for Wall Street to be healthy again, they need to come back.”

It isn’t just Wall Street that will suffer. Over the last decade or two, financial institutions have come to rely on the ability to securitize a chunk of the loans they make in order to manage their risk. And when banks were reluctant to lend, non-bank financial institutions did so, knowing that they could resell those loans to investors through Wall Street’s securitization machine. As is now all-too-well known, that machine got carried away in the years leading up to the 2008 credit crunch and the near collapse of the financial system.

Read more at: The New Risk: Securitization

Other related stories at ddifo.org: Dunkin’s Brouhaha

Worth Its Weight in Junk

Charles P. Wallace at Portfolio.com reports that the junk-bond market has been on a tear. Rates are dropping, making it easier for even weak companies to raise capital.

One year after the worst credit crisis in living memory, U.S. markets have come back to life. That’s especially true in the nether reaches of fixed income, where rates on high-yield debt have dropped from the high teens to the high single digits since a rally started last spring.

That’s welcome news for investors. It’s also good news for smaller and medium-size companies that might not have the best credit ratings but still want to raise funds. Their ability to tap the access capital will improve as the rates on high-yield debt continue to fall. More and more companies that have been shut out of the market will find a way back.

High-yield bonds—or junk bonds, if you prefer—generated a 55 percent return in 2009, more than twice the performance of Standard & Poor’s index of 500 big stocks, which rose 23.5 percent. And while no one expects them to match last year’s rally, many experts believe that their prices will continue to rise and that their rates, which move in the opposite direction, will keep falling.

A number of factors will support the junk-bond rally for another year. “There are many of the view that earnings growth won’t sustain much growth in stocks next year. That helps explain the flows into the high-yield market, where there is a decent coupon and the prospect of at least a moderate capital gain,” says Martin Fridson, CEO of New York-based Fridson Investment Advisors. He expects junk bonds to deliver single digit gains in 2010.

That outlook is much better than at this time last year, when the credit markets were essentially frozen and fund managers were selling bonds at fire-sale prices because they were meeting a wave of redemptions. But the market reached a low point in March and began to climb back by summer. The average spread on high-yield bonds of all ratings narrowed to 6.34 percentage points from 18.86 percentage points in March, according to Merrill Lynch & Co. index data. The spread is the difference between the rate that junk-bond issuers pay and the rate that the Treasury pays to issue its debt. Bank of America Merrill Lynch said in a note to investors that the spread tightening is going to offset an expected rise Treasury yields as the Fed raises interest rates to damp down inflation fears.

Read more at: Portfolio.com

Congress Boosts SBA Loans

Portfolio.com reports that after weeks of talk about the credit crunch facing small businesses, Washington finally is doing something about it.

The $636 billion defense bill passed by the Senate Saturday includes $125 million for the Small Business Administration. The SBA will use the funds to increase the government guarantee on its flagship 7(a) loans to 90 percent and reduce fees on its 7(a) and 504 loans. This will return the guarantee and fees to where they were before November 23, when the SBA ran out of the economic-stimulus funds that enabled the agency to make its loans more attractive.

The SBA’s normal guarantee on 7(a) loans ranges from 75 percent to 85 percent, depending on the size of the loan. The higher guarantee made SBA loans even less risky for lenders than they already were, and the fee reductions made the loans more affordable for small businesses. As a result, SBA lending increased dramatically as a result of the stimulus bill, after cratering last fall and winter along with other sources of credit.

A healthy SBA loan market is important for small businesses, especially those seeking long-term credit—loans that banks often don’t like to make without a government guarantee. SBA lenders and small-business groups had pleaded with Congress in November to find money to keep the higher guarantee and reduced fees in place, but Congress failed to act at that point.

As a result, SBA lending dropped when the stimulus enhancements expired.

This month, the Obama administration began pushing Congress to extend these SBA loan enhancements through September 30, 2010, the end of the current fiscal year. On Wednesday, the House tacked on $125 million to the defense bill, which will fund the higher guarantee and fee cuts through February 28. That’s the bill the Senate will vote on Saturday, before returning to health care reform.

The House appropriated another $354 million for the SBA as part of a $154 billion jobs bill—or “son of stimulus” in the words of Republican opponents—that passed Wednesday. This money would keep the higher guarantee and lower fees in place through the end of the fiscal year.

Democrat Nydia Velazquez, from New York, said the two bills “will provide vital funding for SBA to continue offering affordable small-business credit. Since their enactment earlier this year, these reduced-cost loans have put nearly $14 billion of capital into the small-business economy.”

“While this is an important step, much more will need to be done in the coming months if small businesses are going to realize their full potential as the catalysts of job creation,” said Velazquez, who chairs the House Small Business Committee.

The Senate has no plans to vote on the House’s jobs bill before it goes home for the holidays. It instead plans to craft its own legislation to boost jobs when it returns in January. So the fate of the SBA loan enhancements is uncertain after February 28.

Read more at: Portfolio.com

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