Maximum Capacity

Companies with better credit are also seeing better rates, says Elliott Jaffee, senior vice president and manager of Midwest corporate banking at U.S. Bank, based in Minneapolis. A year ago, companies with A1 to A3 credit ratings (relatively strong capacity to meet financial commitments) were paying LIBOR plus between 0.3 percent and 0.5 percent for credit. This year the same companies might pay LIBOR plus between 0.25 percent and 0.4 percent. Jaffee points out that many A-rated companies are quite large and use bank credit mainly for backup liquidity. They typically fund their debt by issuing commercial paper or otherwise tapping the capital markets.

A flat yield curve has also contributed to better credit deals for many customers. In December 2003, the prime interest rate was 4 percent, the two-year loan rate was approximately 5.05 percent, and the 10-year rate was 7.38 percent. By October 2005, the prime had gone up to 6.75 percent, the two-year rate stood at 7.42 percent, and the 10-year rate was 7.52 percent. “In those 22 months, rates went up 2.75 percent on the short end but essentially stayed the same at the 10-year part of the curve,” Wall says. “People who were borrowing for the short term at adjustable rates a year ago can now borrow for a longer term at fixed rates for roughly the same price, and have interest-rate protection over a longer period.”

In the heat of competition, banks are also just more inclined to say yes than they have been in the past, Wall says. “When a bank has more capacity, they’re more likely to find the good things in a deal,” Wall says. No bank wants to lower its credit standards, he says, but banks do try to “find a way to say yes when in the past they would have said no.”

The Outlook

“A bank can keep lending forever as long as they keep growing their capital, and as long as they can find sources of capital that are cheaper than the rates they get from loaning it out,” Carnes says. But in that spread lurks a problem. The difference between what banks pay for their money and what they make by loaning it out is getting smaller, driven by both competition and rising interest rates. And the shrinking spread may eventually force rates higher.

“We’ve felt a lot of pressure on our interest rate margin this year,” Bakken says. The bank has cut its spread by .5 percent. “Some other banks might see even more than that,” he says.