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Recovery At Least A Year Away, Say Lenders In Phoenix Lending Survey

Terrorist Attacks Push Economy Into Recession; Recovery At Least A Year Away, Say Lenders In Phoenix Lending Survey Economy May Begin Recovery Later in 2002 Or 2003 PHILADELPHIA -- The events of September 11 have pushed the economy into a recession, and recovery is at least a year away, according to lenders participating in the latest Phoenix Lending Survey. Eighty-three percent of lenders nationwide
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Terrorist Attacks Push Economy Into Recession;

Recovery At Least A Year Away,

Say Lenders In Phoenix Lending Survey

Economy May Begin Recovery

Later in 2002 – Or 2003

PHILADELPHIA -- The events of September 11 have pushed the economy into a recession, and recovery is at least a year away, according to lenders participating in the latest Phoenix Lending Survey.

Eighty-three percent of lenders nationwide said a recession was imminent following the terrorist attacks on America. Respondents were surveyed three weeks ago. About half of lenders said the economy will begin to improve during the second half of 2002, but a quarter of respondents said recovery would not occur until the first half of 2003 or later.

“Lenders were already skittish following the steep economic decline of the past year,” said E. Talbot Briddell, president of Phoenix Management Services. “The events of September 11 have diminished their confidence and dimmed their prognosis for recovery. Prior to September 11, a majority of lenders expected the economy to show improvement during the first half of 2002. That optimism was severely undermined last month.”

International borrowers and small and mid-sized businesses may find it more difficult to get a loan following the events of September 11. Fifty-three percent of lenders said they would be less likely to lend to international borrowers, while 42 percent each said they would be less likely to lend to middle market companies and small businesses.

“The more unsettled the economy is, the more conservative lenders will become toward markets they perceive as being less stable,” Briddell noted.

Lenders said the economy would perform at a “D+” level for the remainder of the year. Almost all of the lenders surveyed said they expect loan losses, bankruptcies and unemployment to rise further.

Slightly more than half of lenders said their customers had “moderate” growth expectations for the next six to 12 months, but 44 percent said their customers foresaw “no growth” in that same time period. No lenders said their customers expected “very strong” growth, and only one percent said their customers expected “strong” growth.

Only two industries – light manufacturing and industrial distribution – were named as attractive industries by lenders this quarter. Each was named attractive by 66 percent of respondents. Service companies were named attractive by 50 percent of lenders.

When asked which industries were unattractive to their financial institution, lenders named Start-ups/New Ventures (66 percent), Technology (63 percent), Retail (48 percent) and Health Care (46 percent).

“The continuing sluggish economy has created a number of casualties in the capital markets,” Briddell said. He noted, though, that health care was named unattractive by fewer lenders this quarter than last, when 66 percent said they would not lend to health care concerns. “Health care typically becomes a defensive issue in a slowing economy.”

Fallout from the dot-com sector continued to take its toll on technology companies. Within the technology industry, the most attractive sector was Hardware Manufacturers, but it was considered appealing by only 31 percent of lenders.

When asked which technology sectors were unattractive to their lending institution, 54 percent of lenders named e-Commerce Companies, and 48 percent named Software Developers. A third of lenders said Bio-Tech, Semiconductors and Technology Consultants were unattractive sectors.

In further evidence of a continued economic slump, lenders reported plans to tighten loan structures on all but the smallest-sized loans. Loan structure refers to a range of requirements that lenders attach to a particular loan, such as collateral requirements, guarantees, advance rates and loan covenants. For loans of under $1 million, lenders said they would maintain their current loan structure.

“This suggests that lenders had already tightened up requirements on smaller loans, which tend to be more volatile in this type of environment,” Briddell said.

While most lenders said they planned to maintain their current interest rate spread and fee structure on most loans, a significant 53 percent of lenders said they would increase the spread and fee structure on loans in the $1 million to $5 million category. “Loans in this range have probably been the most competitively sought and priced by lenders recently,” said Briddell. “This tightening suggests that pricing in this competitive sector is finally catching up to the rest of the market.”

Ninety percent of lenders expect further Fed funds rate cuts by the Federal Reserve Bank.

The Phoenix “Lending Climate in America” Survey is conducted quarterly to gauge shifts in lenders' attitudes. Lenders from commercial banks, commercial finance companies and factors across the country are surveyed each quarter. Eighty lenders participated in the survey this quarter.

Phoenix Management Services is a Philadelphia-based turnaround management firm that assists companies encountering financial, operational or management difficulties.

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