|
| |
|
|
 |
 |
 |
| |
Latest Phoenix Management Lending Survey Points to New Concerns Among Lenders
Lenders across the nation reported increased concerns about the lending environment, the economy and their customers' futures this quarter, according to the results of the second quarter "Lending Climate in America" survey administered recently by turnaround firm Phoenix Management Services. After receiving more optimistic results earlier this year, these latest results suggest increased pessimism among lenders in the U.S.
Some of that concern may be tied to increased competition, the survey results suggest. When asked what the single largest impediment to their financial institution's efforts to book and maintain loans was, nearly three-quarters of lenders cited competitive forces; 40 percent said relaxed credit quality standards by competitors was the leading culprit, while 32 percent cited reduced pricing by competitors. Twelve percent blamed the presence of new or alternative providers of capital who had entered the market-again, a nod to the increasing role that competition is playing in the lending arena.
Of less worry to lenders in their quest to book new loans was demand by borrowers. Only 12 percent said lack of borrowing activity was the main impediment to their efforts, and only four percent cited improved working capital by borrowers as the reason.
Hedging the competition
Among the list of competitors concerning lenders is hedge funds. When asked to summarize the impact that hedge funds are having as an alternative source of financing within the marketplace, nearly half of lenders characterized them as a threat. Thirty-eight percent categorized hedge funds as a "moderate" threat, but nine percent said they posed a "serious" threat in the marketplace. Twenty-two percent termed them a "neutral" threat. A modest six percent said they were having a "positive" effect on the marketplace, while a quarter of respondents did not know what type of impact they posed.
Relaxing standards?
For the first time, the survey asked lenders about their institution's posture on the all-important senior debt-to-EBITDA ratio. Somewhat surprisingly, 43 percent of commercial lenders said their financial institution would underwrite credits with EBITDA multiples greater than 4.0x. (Survey respondents included a small group of non-commercial, collateral lenders who do not consider EBITDA multiples when evaluating a loan request; this group was removed from the data for this response.) Another 30 percent of lenders said their institution would underwrite credits based on EBlTDA multiples in the 3.0 - 4.0x range. Only eight percent said the highest senior-debt-to EBITDA multiple their institution would consider was 3.0x.
The higher-than-expected multiples reported by many respondents raise a number of questions, including whether commercial lenders are relaxing credit standards in response to increased competition in the marketplace. But when lenders were asked if they expected changes in their institution's senior-debt-to-EBITDA multiple parameters, 49 percent said they anticipated no change. Much smaller percentages predicted changes - approximately seven percent each - of either more than 1.0x or less than 1.0x. This indicator will be tracked in future quarters.
Customer woes
Competition wasn't the only worry on lenders' minds; they were not overly optimistic about their customers' planned expansion activities either. Less than a quarter reported any significant growth plans by customers. Twenty-two percent said their customers planned to make new capital investments in the next six-to-12 months, while 17 percent said their customers planned to make an acquisition.
That pessimism also extended to customer growth plans. When asked to quantify how strong their customers' growth expectations for the next six-to-12 months were, only nine percent responded "strong" (with no respondents replying "very strong"). That represented a slip from a quarter ago, when 15 percent of lenders said their customers anticipated "strong" or "very strong" growth.
Softening demand for domestic lending
After an apparent one-quarter blip of enthusiasm, lenders have expressed new concern about the domestic lending environment, reporting their lowest confidence levels in eight quarters. Although 45 percent of respondents said they expected corporate lending to be up in the next six months, a noteworthy 19 percent said it would be down, a significant jump in pessimism from the eight percent who predicted the same last quarter.
Middle-market lending expectations were somewhat better. Fifty-nine percent of lenders expect it to rise in the coming six months, while only ten percent expect it to decline. But smallbusiness lending inspires a mixed outlook; 57 percent of lenders anticipate a rise, but a not-insignificant 14 percent expect it to drop, a noticeable jump over the seven percent who anticipated a drop last quarter.
Two other indicators also suggest increased pessimism among lenders. This quarter, 40 percent of lenders said they expected loan losses to rise, up from the 30 percent who predicted the same last quarter. And 30 percent, or nearly one out of three lenders, predict a rise in unemployment, also a jump from the 16 percent who predicted a rise last quarter. Lenders remain skittish about the future.
Lenders also expressed worry about both the short- and longer-term prospects for the economy. When asked to predict how they expect the economy to perform in the next six months, lenders gave the economy a grade of "low C," a drop from the solid "C+" they had assigned it last quarter.
And they remain concerned about the economic outlook into 2006, again predicting a "low C" performance after anticipating a solid "C+" showing last quarter.
What's hot, what's not
When asked which industries were most attractive to their lending institution, respondents named three that have topped the list for ten consecutive quarters: light manufacturing (78 percent), industrial distribution (71 percent) and service companies (60 percent).
On the flip side, start-ups/new ventures were named an unattractive industry by 56 percent of lenders. It was the only industry that received a negative rating by more than half of respondents. Lenders clearly haven't forgotten the drubbing they took after the dot-corn implosion.
If it ain't broke...
Most lenders reported no plans to change their existing loan structures in all sizes of loans. In fact, the percentage of respondents planning to maintain their current loan structures reached the all-time high of 84 percent, last reported three quarters ago.
Most lenders - 69 percent said they planned to maintain their current interest rate spread and fee structure on all sizes of loans. While still a relatively small percentage, 17 percent said they expected their financial institution to reduce its lending spread, a relatively consistent response for the last eight quarters.
What lies ahead?
After last quarter's results, which suggested some new optimism, there appears to be some regression in confidence levels. Of particular note is the new concern lenders are expressing over a possible softening in the domestic lending climate. Despite news reports of a slowly recovering economy, lenders still need some additional reassurance, preferably in the form of increased loan demand and more aggressive expansion by existing customers, before they are likely to report a shift in optimism and confidence.
|
|
 |
 |
 |
|
|
|
|
|
|
|
