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December 14, 2004

Is Economy Stuck in Neutral? Lenders Report New Drop in Confidence, According to Phoenix Lending Survey

PHILADELPHIA (December 14, 2004)—The economic recovery is stalled in neutral, according to lenders nationwide, whose confidence levels in the economy dropped significantly this quarter, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey. Most of the 99 lenders who completed this quarter’s survey downgraded the economy’s future performance to a “C,” said their customers had very little plans for expansion or hiring, and predicted less borrowing demand.

“This marks the second consecutive quarter that lenders’ confidence in the economy has dropped,” said E. Talbot (Tal) Briddell, Managing Director of Phoenix Management Services. “As the economic recovery gained traction, we had six quarters of slowly but steadily increasing optimism in the economy. This downturn in outlook suggests a new level of concern.

“In lenders’ eyes, the economy has suffered a relapse. What’s unknown is whether it is a significant back slide or a temporary blip.”

For the second quarter in a row, lenders’ expectations for domestic loan demand dropped. Only 32 percent expect corporate lending demand to rise, down markedly from the 55 percent who said the same last quarter. More than half of lenders predicted that loan demand for middle market and small business customers would rise, but that 56 percent figure was down from 70 percent who made the same prediction last quarter.

Lenders’ flagging confidence levels also extended to current customers. When asked about their customers’ expansion plans in the next six to 12 months, less than a quarter of lenders reported any significant plans. Twenty-two percent said their customers planned to make new capital investments, and eighteen percent said their customers intended to make an acquisition. Seventeen percent, each, reported customers plans to raise additional capital or introduce a new product or service.

Only fourteen percent said their customers planned to hire new employees. Twelve percent said their customers would enter new markets.

“Lenders do not see happy days ahead, at least not in the immediate short-term,” observed Briddell. “Their futures are closely linked to the health of their customers, and, few are reporting aggressive growth plans that would encourage lenders.”

When asked which potential result of the Fannie Mae crisis concerned them the most, a third of lenders said they feared that taxpayers might have to bail out Fannie Mae, similar to the S&L crisis of the 1980’s. Fifteen percent said their biggest concern was that homeowners would have less access to affordable mortgage loans, while 12 percent feared that swings in U.S. interest rates could be exacerbated as Fannie Mae hedges against rate increases. Ten percent said the most worrisome potential outcome of the crisis was that it could launch a new round of corporate scandals.

Twenty-four percent of lenders said they were not concerned about the Fannie Mae situation.

Lenders also expressed concern about oil prices. Eighty-seven percent said that rising oil prices posed a “very serious” or “moderately serious” threat to the health of the world economy. Only 12 percent believed rising oil prices posed a “minimal” threat.

For the second quarter in a row, lenders reported lower growth expectations for their customers. Only 11 percent said their customers expected strong growth in the coming six to 12 months, down from 21 percent who said the same three months ago. Eighty-two percent of lenders said their customers anticipated moderate growth, up from 76 percent who said the same last quarter.

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 (72 percent), Industrial Distribution (68 percent) and Service Companies (68 percent). But both Light Manufacturing and Industrial Distribution suffered sharp declines in enthusiasm from last quarter.

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 60 percent naming it unattractive.

Most lenders reported plans to maintain their existing loan structures, although there was an increase in the percentage of lenders who said they planned to tighten their current loan structures.

A majority of lenders also reported plans to maintain their interest rate spread and fee structures on similar credit quality loans, but 15 percent, averaged across all size loans, said their institution planned to reduce them.

Ninety-seven percent of 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. Ninety-nine 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 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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