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September 19, 2005

Lenders Take Dim View of Auto Industry, With Nearly 90 Percent Predicting ‘Flat’ or ‘Weak’ Sales for Big 3, According to Phoenix Lending Survey Results

PHILADELPHIA (September 19, 2005)—One-third of lenders nationwide expect sales for the Big 3 automakers and their North American suppliers to be weak over the next six months, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey. And half of lenders said sales would remain “flat,” underscoring ongoing concern over the health of the American auto industry.

When asked to identify the single most important step the auto industry could take to return itself to profitability, 54 percent of lenders said successful cost-cutting initiatives by the Big 3 were most needed. Twenty-nine percent said the introduction of new, more energy-efficient models that can compete with Asian automakers was required. Six percent said a change in management was needed, and three percent said a federal energy strategy that mandates the production of more fuel-efficient cars was necessary to return the Big 3 to profitability.

Eight percent of lenders believe that there are no steps that can be taken to return the Big 3 to profitability.

“The American auto industry and its supplier base are in the midst of a major restructuring, and that has lenders nervous,” said E. Talbot (Tal) Briddell, Managing Director of Phoenix Management Services. “High prices for steel and other raw materials, rising health and labor costs, increasing competition from overseas, and now the sky-rocketing fuel prices in the wake of Hurricane Katrina have slammed U.S. automakers and their suppliers. Lenders are understandably concerned about the potential for failure and believe the auto industry needs to take steps to revitalize itself before it’s too late.”

Nine out of ten lenders said their financial institution would feel concern about making a loan to an automotive supplier with exposure to GM, Daimler Chrysler or Ford—but it would not necessarily preclude them from making the loan, if asked. Six percent said the state of the auto industry would play almost no role in their financial institution’s evaluation of the loan request, but two percent said their institution would turn the request down outright because of the auto industry’s problems.

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 eight quarters. Forty-six percent of lenders predicted bankruptcies would rise, up from 40 percent last quarter. But they were more optimistic about the job market, with only 18 percent predicting a rise in unemployment, compared to 30 percent last quarter.

“With the new bankruptcy laws taking effect this fall, it is not unexpected for lenders to be more concerned about a possible spike in bankruptcies,” Briddell noted.

Less than a quarter of lenders predict any significant expansion plans by their customers in the next six to 12 months. Twenty-one percent said their customers planned to make new capital investments, 19 percent said their customers intend to make an acquisition, and 16 percent, each, said their customers planned to raise additional capital or introduce a new product or service. Fifteen percent said they planned to hire new employees. Only thirteen percent said their customers would be entering new markets in the coming year.

Lenders reported moderate growth expectations for their customers. Only four percent said their customers expected strong growth in the coming six to twelve months, down from nine percent who said the same last quarter. Ninety percent of lenders said their customers anticipated moderate growth, up from 84 percent last quarter. Six percent said their customers anticipated no growth, similar to the seven 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 (78 percent), Industrial Distribution (70 percent) and Service Companies (70 percent).

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 67 percent naming it unattractive.

Roughly 80 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 reported plans to maintain their interest rate spread and fee structures on similar credit quality loans, except for the under $1 million loan category, where 36 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 more than half 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. One hundred lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during August.

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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