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November 20, 2008
Survey Highlights Impact of Constrained Liquidity
PHILADELPHIA (November 20, 2008) —- Lenders across the nation are concerned about the reduction in consumer purchasing power over the next six months. They also anticipate that continued constrained liquidity will be a major factor in the economy during this same time period, according to the results of last quarter’s Phoenix Management “Lending Climate in America” Survey.
Nearly half – 46 percent – of respondents designated the reduction in consumer purchasing power due to the decline in disposable income as the economic issue borrowers/customers are most concerned with in the near term. Forty-four percent indicated increasing commodity prices as the most concerning economic issue. Three percent of lenders indicated the following issues/responses: higher labor rates, volatile exchange rates, impact of importing lower-cost goods and no response to this question.
And, 75 percent of lenders designated constrained liquidity in the capital markets as the factor with the strongest potential to impact the near-term economy. The sluggish housing market was chosen by 58 percent of respondents as having significant potential to have near-term economic impact. Thirty percent of lenders chose the unstable energy prices, while fourteen percent designated the outcome of the upcoming presidential election. Finally, four percent chose the U.S. budget deficit and one percent chose the Iraqi war as having strong potential to impact the near-term economy.
“Although recent news about falling prices may provide a short-term boost to disposable income,” says Michael Jacoby, Managing Director and Shareholder of Phoenix Management Services, “diminishing prices and deflation is generally not good for the economy.”
Lender’s expectations for the economy deteriorated slightly from the previous quarter. Lenders expect the economy to perform at a high “D” level during the next six months. The respondents” expectations for longer-term improvement remained better than the near-term outlook with a “C” expectation level.
Respondents (51 percent) also believe inflation levels will trend equivalent to current levels over the next six months. Thirty percent of respondents opined that inflation would trend higher over the next six months. The remaining nineteen percent of respondents believe inflation will trend lower (or had no response) over the next six months.
The percentage of respondents with their customer having no growth expectations over the next 6-12 months rose significantly from the previous quarter to 50 percent ” the highest level recorded in this survey in the last 8 years. Forty-nine percent of lenders opined their customers had moderate-growth expectations, down from sixty-six percent in the previous quarter.
Nearly a quarter indicated their financial institution would consider a loan request with a Senior Debt to EBITDA multiple as high as 4-5x. Nine percent of respondents indicated their institution would only consider a loan request with a multiple of less than 3x, while another 16 percent of lenders opined they would consider a loan request with a multiple as high as 3-4x. Four percent of respondents indicated they would consider a loan request with a Senior Debt to EBITDA multiple greater than 5x. Twenty-five percent of respondents indicated they are collateral lenders and do not utilize cash flow multiples as the primary factor in credit decisions.
Twenty-eight percent of lenders believe their institution will have no change in the highest Senior Debt to EBITDA multiple it will consider in regards to a new loan request. Eighteen percent of respondents believe internally that multiple will decrease less than 0.5x, while another eight percent believe that multiple will decrease by more than 0.5x. Six percent of lenders opined that the multiple would increase at their financial institution over the next six months. Twenty-three percent of respondents indicated they were collateral lenders and did not specifically focus on that multiple.
Forty-three percent of respondents” customers anticipate introducing new products or services in the next six months. Forty-one percent of customers plan on raising capital in the next two quarters. Twenty-five percent each of lenders” customers anticipate making an acquisition and entering new markets in the next six months. Twenty-one percent of customers plan on making new capital investments, while fourteen percent intend on hiring new employees.
When asked to identify three industries that will experience the most volatility in the next six months, while fifty-eight percent of lenders designated the Finance and Insurance industry, fifty-six percent choose the Construction industry as the most likely to experience volatility and fifty-three percent of lenders chose the Retail Trade industry. Forty-five percent of lenders believe the Real Estate and Rental/Leasing industries will experience the most volatility. Twenty-three percent of lenders believe the Manufacturing industry will experience the most volatility. The last industry to register a meaningful percentage ” Transportation and Warehousing ” was selected by twenty percent of respondents.
The Phoenix Management Services “Lending Climate in America” survey is conducted quarterly to gauge shifts in lenders” attitudes toward the economy. The Phoenix survey includes lenders from commercial banks, commercial finance companies and factors across the nation. Phoenix has been conducting this survey for over 10 years.
Phoenix Management Services is a recognized leader in operationally focused turnaround, crisis and interim management and strategic advisory services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in more than 850 assignments nationwide across a variety of situations and industries. With offices in Philadelphia, New York, Boston, Washington DC, Ft. Lauderdale and Atlanta, Phoenix preserves and enhances the value of its clients’ companies by solving the operational and financial challenges they encounter.
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