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June 27, 2006
PHILADELPHIA (June 27, 2006)—An overwhelming 98 percent of lenders nationwide say their customers are either “somewhat” or “very” concerned about the recent rise in gasoline prices ” and nearly 60 percent report their customers have or will raise prices to offset the higher energy costs, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey.
When asked what steps their customers are taking in response to climbing gasoline prices, 59 percent of lenders said their customers have or will raise prices or fees to mitigate the increased costs. Eight percent of lenders said their customers have put hiring plans on hold, and six percent said their customers have postponed capital investments.
“Climbing energy costs are clearly having an impact among commercial enterprises across the nation,” said Michael E. Jacoby, Managing Director and Shareholder of Phoenix Management Services. “Nearly every single lender surveyed identified gasoline prices as a worry for their customers, and 60 percent predict a corresponding rise in their customers” prices, as gas prices climb.”
When asked to identify the single biggest impediment in their efforts to book and maintain loans, lenders were almost evenly split among three: relaxed credit quality standards by competitors (32 percent); new capital providers (31 percent); and reduced pricing by lenders (28 percent).
Two-thirds of lenders view hedge funds as a threat to the marketplace.
Lenders were asked to identify the highest multiple of Senior Debt to EBITDA that their financial institution would consider with regard to a loan request. They responded:
Multiple greater than 5x: 13 percent (this quarter); 18 percent (12 months ago) Multiple 4 ” 5x: 24 percent (this quarter); 15 percent (12 months ago) Multiple 3 ” 4x: 23 percent (this quarter); 30 percent (12 months ago) Multiple of less than 3x: 6 percent (this quarter); 8 percent (12 months ago)
“Lenders” responses suggest that they continue to support aggressive valuations, and, if anything, have become a bit more aggressive than they were last year,” Jacoby said.
For the second consecutive quarter, lenders believe the short-term outlook for the economy is stronger than its long-term outlook.
“When we asked lenders how they expected the economy to perform over the next six months, they assigned it a low ”B” grade,” Jacoby said. “But when we asked them how it would perform in the first half of 2007, they downgraded the economy to a low ”C.”
“There remain some concerns among lenders about the longer-term health of the economy.”
For the third consecutive quarter, lenders reported moderately stronger growth plans by customers. Twenty-one percent said their customers had “strong” or “very strong” growth expectations, up from the 16 percent who said the same last quarter.
Lenders also reported more aggressive plans by customers in the next six to 12 months:
Make new capital investments: 25 percent Introduce new products or services: 17 percent Make an acquisition: 17 percent Hire new employees: 15 percent Raise additional capital: 14 percent Enter new markets: 13 percent
Lenders expect loan demand to remain relatively unchanged, although 46 percent predicted small business lending would increase in the next six months. They also remain on the alert for loan losses, with 65 percent predicting an increase, and expect a rise in interest rates, which 88 percent anticipate.
More than 85 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories.
Roughly 70 percent of lenders plan to maintain their interest rate spread and fee structures on similar credit quality loans. In the greater than $10 million loan category, 29 percent of respondents said they planned to reduce the interest rate spread and fee structure.
The Phoenix Management Lending Climate in America Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. Eighty-two lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during May.
Phoenix Management Services is an operationally-focused advisory firm, providing turnaround, crisis and interim management and investment banking services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in over 700 assignments nationwide across a variety of situations and industries. With offices in Philadelphia, New York, Boston and Ft. Lauderdale, Phoenix preserves and enhances the value of its clients’ companies by focusing on the operational and financial challenges they encounter.
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