Fed pauses rate hikes; soft landing or year-end recession still up in the air

 ’23 harvest: whether the weather cooperates

The planting season is complete and, as is always the case, our attention turns to the harvest, delivery and, most important, the weather.

Drought continues to be a factor in Kansas, with growing concern in Nebraska, according to Eric Gorman, senior transaction origination management officer in CoBank’s Capital Markets division. Gorman says that areas east of Omaha had been looking good for precipitation and a strong harvest, but renewed concerns about precipitation have arisen since mid-June. Potential grain production for areas west of Omaha—except for California—remains a bit of an unknown.

“Areas around Fresno are as green as I’ve ever seen them this time of year,” Gorman said. “Right now, they likely have more water than they know what to do with. We usually see them trying to save as much as possible, but they have nearly every dam and lock opened as full as it will go trying to drain it before the snowmelt arrives.”

Gorman added that commodity prices have continued to come down slightly, although a short rally raised prices marginally over the past few weeks. Inverted commodity prices—where near-term prices are higher than prices further out—are beginning to correct themselves but remain inverted.

Gorman also said the market is continuing to send producers a “sell now” signal, which could change between now and harvest based on weather conditions. 

Private communications company valuations defy the law of supply & demand

Twelve months ago, private communications company M&A activity was practically raging as much-anticipated industry consolidation took place. Now, higher interest rates, general economic uncertainty and continuing supply chain issues have slowed activity to a crawl. 

Despite the slowdown, Jeff Johnston, CoBank's lead communications economist, says that private company valuations remain strong, appearing to buck the law of supply and demand.

We asked Johnston a simple question: What gives?

“Conventional wisdom says that company valuations would decrease as the demand for acquisitions decreases and the supply of acquisition targets remains strong,” Johnston said. “Valuations are a little off their recent highs, but they remain robust.

“These companies are still very attractive to own and acquire,” he added. “It’s especially true in rural America where there is a lot of growth as the overall trend toward digitization continues to skyrocket. So, we believe the dip in M&A activity is transitory. Once we get past the current environment, activity is going to pick up because there is still a lot of industry consolidation that needs to happen.”

Click on the following link to see Johnston’s comments on video.

Commercial bank pull-back continues; finicky approach tanks some deals

A vastly more conservative approach to risk by commercial banks is extending the time it takes borrowers to obtain new term loans or lines of credit, or even renew existing facilities. 

According to Bill Fox, managing director of Capital Markets with CoBank, many commercial banks have become more hesitant to enter into Power & Energy industry deals and are, in some cases, withdrawing altogether.

“At the beginning of the year, we wondered whether commercial banks would approach 2023 with a sense of optimism or a sense of fear,” said Fox. “It’s becoming clear that the fear that dominated last year’s market is extending into 2023. Commercial banks experiencing deposit flight, flagging stock prices, stressed commercial real estate lending portfolios and increased regulatory scrutiny have taken their foot off the gas, and in some cases, even pumped the brakes.

“Many commercial banks are being very selective in their deal choices,” added Fox. “They’re raising more credit questions, requiring defined ancillary business and raising their fees. And in several cases we’re aware of, commercial banks have withdrawn from deals entirely, leaving borrowers and syndicated lending partners empty-handed.”

Fox said that the finicky approach by commercial banks is reaching into all segments of the market—money center banks and smaller banks alike—and even affecting customers seeking simple renewals with long-time relationship lenders.

“Customers need to plan further ahead, even for routine renewals,” Fox said. “What used to be a two- or three-week process has extended to more than a month as banks take the time to consider if a deal meets their return hurdles. Higher extension fees are also part of the mix. What was previously a five-basis-point extension fee can now be as high as 20 or 25 basis points. 

“CoBank is one of the few banks that is totally open for business,” Fox concluded. “We are advising our customers to take extra time, prescreen their existing lender group with us as their advisor, and be prepared to adjust pricing, structure and/or lenders, if needed. We can’t simply assume that a renewal will be successful like in the past, but we shouldn’t assume failure either. We can do the work with our customers and deliver them success.”