Cerebro Capital, a commercial loan platform, released its Q2/21 survey on non-bank lending for middle-market commercial and industrial loans. Lenders in the sector experienced increased demand for credit because of the booming M&A market and the improving economy, according to the survey. At the same time, underwriting standards and loan terms continue to ease because of increasing competition among lenders. The growth in requests for credit and a borrower-friendly environment started in the beginning of 2021,as business optimism in economic recovery increased and companies began looking for ways to spur growth.
Cerebro’s analysis of the middle-market commercial and industrial loan market includes its quarterly survey and the Federal Reserve’s quarterly survey of commercial banks. Cerebro launched its survey in the second half of 2020, marking the Q2/21 version as the fourth consecutive survey providing insights into the $3 trillion credit market from alternative lenders that compete with commercial banks for business. Survey participants included managing directors and vice presidents who manage lending in the private credit and mezzanine funds and business development spaces. These lenders work with middle-market borrowers and offer loan sizes of between $2 million and $100 million.
Lending Demands Ease for Larger Loans
Cerebro’s survey reported credit standards have become more borrower friendly, as 36% of lenders reported easing standards over the last three months. With a jump from Q1/21, when 28% of lenders were easing credit, the market continues to trend upward, as lenders expect their capital positions to improve.
The market is also showcasing signs of sharp economic improvement as COVID-19 vaccines have been distributed. Additionally, nearly 60% of lenders indicated that increased competition from other lenders was a significant factor in easing standards over the last three months.
Commercial Loan Inquiries on the Rise
Nearly 70% of lenders experienced increased demand for credit in comparison to the prior quarter. Responses from lenders with increased demand indicate that the top two reasons for new loan questions were due to M&A (91% said this was an important factor) or because other sources of capital were less attractive.
In Q1/21, 27% of non-bank lenders indicated that M&A activity was not an important driver in demand for them; however, in Q2/21 that number dropped to 9%. Borrowers searching for better terms on their capital continued to be a strong driver quarter over quarter, with 70% of lenders indicating this as significant reason why they saw more deal flow.
Borrower Outlook Trends Positive
According to the survey, 28% of lenders expect that larger loans will become even easier to get in the next six months and they also expect rates and terms will continue to get better for borrowers in the face of competition from other lenders. In addition, 94% of lenders surveyed who are expecting to ease standards anticipate doing so in response to increased lender competition, which is a 10% increase compared with the prior quarter. Expected improvement in a lender’s loan portfolio as well as increased risk tolerance were the next highest reasons driving the ability to ease credit standards, with 65% and more than 80% of lenders selecting these factors, respectively.
“We continue to see loan terms improve as demand and competition from other lenders increases. To win more loans, lenders made concessions on loan terms because of reduced borrower industry risk, improved liquidity position and increased tolerance for risk,” Matthew Bjonerud, CEO of Cerebro Capital, said. “Hungry lenders coupled with eager borrowers makes for a prime market that will continue into Q3.”
