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April 23, 2008

Lenders Predict Rough Road Ahead for the Economy

Results of Phoenix’s Lending Survey Grades Economy a “D”

PHILADELPHIA (April 23, 2008) —- Lenders across the nation foresee increasing bankruptcy rates, little or no growth from their customers and tightening credit as major symptoms of this economic downturn according to the results of last quarter’s Phoenix Management “Lending Climate in America” Survey.
Lenders” expectations for the economy continued to decline from the previous quarter. Lenders expect the economy to perform at a “D” level during the next six months. The respondents” expectations for longer-term improvement remained only marginally better than the near-term outlook with a low “C” expectation level.
And, they don”t think the Economic Stimulus Package will help. An overwhelming majority of lenders (99%) believe that the Economic Stimulus Package will have moderate to little impact on the U.S. economy over the next 12 months.
“Lenders have been very reliable when it comes to predicting what would happen with the economy. If they forecast correctly, it looks like the Fed will be reducing interest rates again in the near future,” says Michael Jacoby, Managing Director and Shareholder of Phoenix Management Services.
Seventy-eight percent of lenders anticipate a 50 bps (or more) cut in interest rates over the next six months (versus sixty percent in the previous survey). Thirteen percent of lenders are expecting interest rates to decline 25 bps in the first half of 2008. The remaining nine percent of respondents believe that interest rates will either remain unchanged or marginally increase over the next six months. These answers were provided before the Federal Reserve slashed the Fed Funds rate by 75 basis points on March 18, 2008.
Expectations for deteriorating credit quality remained at near unanimous levels. The loan loss diffusion index was at 97 percent, in line with the previous quarter, while ninety-nine percent of lenders anticipate higher bankruptcies. The percentage of respondents anticipating higher unemployment grew to 78 percent ” up from 74 percent in the previous quarter. Lastly, seventy-five percent of respondents anticipate increased bank failures, as compared to thirty-eight percent in the prior quarter.
The percentage of respondents with the customer having no growth expectations over the next 6-12 months doubled to thirty-three percent. Sixty-five percent of lenders opined their customers had moderate growth expectations, down from 83% the previous quarter resulting from the increase in “no growth” responses.
Respondents anticipate the Construction industry will experience the most volatility in the next six months. When asked to identify three industries that will experience the most volatility in the next six months, seventy-four percent of lenders designated the construction industry, with sixty percent choosing the Real Estate and Rental/Leasing industries as the most likely to experience volatility. Fifty-one percent believe the Finance and Insurance industries will experience the most volatility while fifty percent designated the Retail Trade industry.
The percentage of lenders expecting to tighten their existing loan structures increased to fifty-one percent (versus thirty-eight percent in the previous survey).
More lenders anticipate increasing their current lending spreads in this interest rate environment. Sixty-seven percent of respondents (versus 51 percent in the previous quarter) expect to increase lending spreads from their current levels.
About the Survey
The Phoenix Management Services “Lending Climate in America” survey is conducted quarterly to gauge shifts in lenders” attitudes toward the economy. About 80 respondents completed the online questionnaire during March including lenders from commercial banks, commercial finance companies and factors across the country.
About Phoenix Management Services
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 825 assignments nationwide across a variety of situations and industries. With offices in Philadelphia, New York, Boston, 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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