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June 9, 2005

Economy May Be Backsliding, According to Lenders Responding to Phoenix Lending Survey

PHILADELPHIA (June 9, 2005)—Nearly half of lenders nationwide believe that hedge funds pose a threat to the marketplace as an alternative source of funding, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey. Overall, lenders were significantly more pessimistic about the economy, the lending climate and their customers than they were a quarter ago.

When asked to classify the growing role that hedge funds are playing as an alternative source of funding, nine percent said they posed a “serious” threat, while 38 percent said they posed a “moderate” threat to the marketplace. Twenty-two percent said their impact was “neutral,” while six percent said it was “positive.” A quarter of respondents said they did not know what type of impact hedge funds had.

“Many lenders today are being negatively impacted by the growing role that hedge funds are playing in the financing market,” said E. Talbot (Tal) Briddell, Managing Director of Phoenix Management Services. “Lenders are clearly aware of their presence and don’t like what they see.”

For the first time, Phoenix asked lenders about their financial institution’s Senior Debt to EBITDA ratio. Forty-three percent of commercial lenders said their institution would underwrite credits with EBITDA multiples greater than 4.0x. Another 30 percent said their institution would underwrite credits based on EBITDA multiples in the 3.0 ” 4.0x range, while eight percent said the highest ratio their financial institution would consider was 3.0x.

“It is striking that more than 40 percent of lenders indicated a willingness to go above 4.0x,” said Briddell. “This relaxing of underwriting standards is clearly a response to the abundance of capital available and the growing competition among lenders for limited borrower business.”

Lenders are not bullish about the lending environment, the economy or their customers’ growth plans. They do not foresee a major growth in loan demand. Although 45 percent said they expected corporate lending to rise in the next six months, a notable 19 percent said it would be down, a significant jump in pessimism from the eight percent who predicted the same last quarter.

“After an apparent one-quarter blip of enthusiasm, lenders are feeling very skittish about the domestic lending environment,” said Briddell. “In fact, this is the most pessimistic they have been in eight quarters.”

Lenders predicted the economy would perform at a low C grade for the remainder of this year, a slip from the C+ they gave it last quarter. Forty percent of lenders predicted bankruptcies would rise, up from 30 percent last quarter. And 30 percent said unemployment would increase, compared to 16 percent who said the same last quarter.

Less than a quarter of lenders predict any significant expansion plans by their customers in the next six to 12 months. Twenty-two percent said their customers planned to make new capital investments, 17 percent said their customers planned to hire new employees, and 16 percent, each, said their customers planned to raise additional capital, make an acquisition or introduce a new product or service. Only thirteen percent said their customers would be hiring new employees in the coming year.

For the third quarter in a row, lenders reported lower growth expectations for their customers. Only nine percent said their customers expected strong growth in the coming six to 12 months, down from 13 percent who said the same last quarter. Eighty-four percent of lenders said their customers anticipated moderate growth.

“For every economic indicator we track, lenders have downgraded their outlook,” Briddell noted. “We have to wonder if lenders are anticipating an economic back-slide, or whether this is just a trough in the up-and-down pattern of a recovering economy.”

When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than two years ” Light Manufacturing (78 percent), Industrial Distribution (71 percent) and Service Companies (60 percent).
Start-ups/New Ventures were deemed the least attractive industry to lend to, with 56 percent naming it unattractive.

More than 80 percent of lenders reported plans to maintain their existing loan structures, and a majority of lenders reported plans to maintain their interest rate spread and fee structures on similar credit quality loans.

All lenders expect the Fed to raise rates in the coming six months, with most predicting a 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. 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.

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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