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March 31, 2004

”All Systems Go” for Economy Except Job Market, Say Lenders Responding to Phoenix Lending Survey

PHILADELPHIA (March 31, 2004)—A rebound in the U.S. job market is at least a year away, according to 55 percent of lenders nationwide, a sharp turnaround from their sentiments three months ago, when the same percentage said new job creation would have occurred by now.

Forty-three percent of the 110 lenders who participated in this quarter’s Phoenix Management “Lending Climate in America” survey said the job market would rebound during the first half of 2005, and 12 percent said it would take until the second half of next year for jobs to return. Slightly more than a third of lenders thought the job market would rebound this year, but the vast majority of that group—35 percent—did not expect to see job growth until the latter half of this year.

“This is a stark turnaround in expectations from the fourth quarter of 2003, when 86 percent of lenders predicted a job market rebound during 2004—and most of them believing it would happen during the first half of this year,” said E. Talbot (“Tal”) Briddell, Managing Director of Phoenix Management Services. “This stubborn job market is almost the only thing standing in the way of lenders giving their full endorsement to this fledgling economic recovery.”

Despite their concerns about the job market, lenders expect lending to corporate, middle market and small business customers to rise in the next six months. Sixty-three percent of lenders predicted lending to large, corporate customers would increase, while 77 percent said lending to middle market customers would rise and 78 percent said the same about small business lending. Only 29 percent of lenders predicted any increase in lending to international customers.

Another terrorist attack—not lack of job growth—poses the greatest threat to derailing the economic recovery now underway, according to lenders. When asked which single event held the most potential to undermine the nascent economic recovery, 46 percent of lenders selected another terrorist attack. Twenty-six percent said the failure of the U.S. job market to rebound posed the biggest threat to the economic recovery, while 12 percent said a sharp drop in the real estate market could slow the recovery.

Although lenders expect loan demand to rise, few reported expectations for expansion by existing customers. Only 26 percent said their customers planned to make new capital investments in the next six to 12 months. Eighteen percent said their customers planned to introduce a new product or service, and 17 percent said their customers planned to raise additional capital. Sixteen percent said customers planned to make an acquisition; 14 percent said their customers planned to hire new employees; and nine percent said customers had plans to enter new markets.

When asked to assess their customers’ growth expectations over the coming year, 76 percent termed them “moderate.” Twenty percent reported “strong” customer expectations for growth.

“While the overall confidence levels toward customer growth remain modest, this is the fifth consecutive quarter that lenders have increased their predictions of customer growth,” said Briddell. “It will take some time, though, along with a significant jump in job creation, before companies feel confident enough to loosen the purse strings and invest in expansion.”

When asked which industries were most attractive to their lending institution, lenders named three that have topped the list for six consecutive quarters—Light Manufacturing (78 percent), Industrial Distribution (74 percent) and Service Companies (67 percent).

Start-ups / New Ventures were named an unattractive industry by 63 percent of lenders. It was the only industry that received a negative rating by more than half of respondents.

Three-quarters or more of lenders reported plans to maintain their current loan structures in all sizes of loans. But 16 percent of lenders indicated they would relax their loan terms and conditions, continuing a slightly upward trend toward relaxing loan structures that began a year ago.

Most lenders said they planned to maintain their current interest rate spread and fee structure on all sizes of loans. For larger loans, though, there is a growing bias toward reducing the spread and fee structure. Twenty-six percent of respondents said they planned to reduce the spread and fee structure on loans greater than $10 million, and 20 percent of respondents reported the same for loans of $6 million to $10 million.

Three-quarters of lenders predict the Fed will raise interest rates in the coming six months, with most predicting a quarter- or half-point hike.

About the Survey

The Phoenix Management Lending Climate in America Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. Lenders from commercial banks, commercial finance companies and factors across the country are surveyed each quarter. Respondents completed a written questionnaire during Feburary and March of 2004.

About Phoenix Management Services

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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