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December 7, 2005

Half of Lenders Nationwide Say Their Customers Have Been Forced to Raise Prices in Response to Rising Fuel Costs, According to Phoenix Lending Survey Results

PHILADELPHIA (December 7, 2005)—Half of lenders nationwide say their customers have been forced to raise prices on goods or services in response to the recent jump in fuel prices, according to the results of this quarter’s Phoenix Management Services “Lending Climate in America” survey. And 60 percent of lenders believe the rise in fuel costs has the single largest potential to derail the economy.

“Lenders are reporting to us that their customers across the nation are still feeling the effects of Hurricanes Katrina and Rita, mainly in the form of climbing fuel prices,” said Michael E. Jacoby, Managing Director of Phoenix Management Services. “Until prices for fuel and other products in the supply chain that are heavily dependent upon fuel stabilize, companies are unlikely to lower prices on their goods or services.”

Lenders are also concerned about the cost of rebuilding the Gulf Coast region. Nearly 70 percent said they were “somewhat” or “very” concerned about the potential impact on the economy of the federally-funded $200 billion rebuilding effort. Twenty percent of respondents said they were “mildly” concerned, while 13 percent said they were not concerned at all.

“Lenders clearly view the price tag for rebuilding the Gulf Coast as a cause for concern,” Jacoby said. “They know it’s necessary, but they worry about the long-term cost to the economy for the federal government to write this check.”

Overall, lenders do not anticipate much growth on the part of their customers. Only 21 percent said their customers plan to make an acquisition in the next six to 12 months. Twenty-one percent said their customers intend to make new capital investments, and 16 percent said their customers planned to raise additional capital.

Fourteen percent, each, said their customers planned to: hire new employees, enter new markets, or introduce new products or services.

Lenders do not expect loan demand to be strong in the coming six months, either. Only 19 percent expect corporate loan demand to increase, while 35 percent anticipate an increase in middle market lending and 37 percent expect small business lending to strengthen.

Lenders expect the economy to perform at a “C” grade level during the next six months, the lowest short-term grade they have assigned the economy in nine quarters. Seventy-two percent of lenders predicted loan losses would rise, up sharply from 36 percent last quarter. Seventy-one percent said bankruptcies would increase, up from 46 percent last quarter. They were also more pessimistic about the job market, with 50 percent predicting a rise in unemployment, compared to 18 percent last quarter.

“Despite signs that point to a slowly strengthening economy, many lenders expect the economy to weaken,” said Jacoby. “Until they see tangible and sustained growth from their customers, they are unlikely to change their outlook.”

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 (67 percent), Service Companies (63 percent), and Industrial Distribution (61 percent).

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 55 percent naming it unattractive.

Roughly 75 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories, although one out of five lenders said they planned to tighten their loan structure in the under $1 million category.

A majority of lenders plan to maintain their interest rate spread and fee structures on similar credit quality loans. In the under $1 million loan category, 31 percent of respondents said they planned to increase the interest rate spread and fee structure. Nearly all lenders expect the Fed to raise rates in the coming six months, with 65 percent 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. Ninety-five lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during October and November.

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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