Michael E. Jacoby, Senior Managing Director & Shareholder, Phoenix Management Services
Michael E. Jacoby,
Senior Managing Director & Shareholder,
Phoenix Management Services
Jack Murdoch, Analyst, Phoenix Management Services
Jack Murdoch,
Phoenix Management Services

The results of Phoenix Management’s Q2 2014 “Lending Climate in America” survey showed that lenders have a high level of confidence in domestic lending opportunities, which is an indication that banks continue to be encouraged by the economic environment in the U.S. Our Diffusion Index, which is the percentage of positive expectations less the percentage of negative expectations, was equal to last quarter’s strong reading of 45%.

Each quarter Phoenix Management distributes its proprietary “Lending Climate in America” survey to more than 5,000 lenders nationwide. In the Q2 2014 survey, we saw improvement in many of our lending survey metrics, including increased optimism in both the short-term and long-term economic outlook and improved commercial lending expectations. These results coincide with a positive trend in economic indicators, such as the 1.1% growth in retail sales and average job growth of 195,000 during the first quarter. In Q2 2014, our survey results continued to show lender’s confidence and anticipated stability of the economy.

Some of the responses indicated that lenders appear to be somewhat cautious about their optimism, as they reported a notable drop in the senior debt to EBITDA leverage ratio that their institution would consider. Additionally, the recent improved trend in economic indicators has not overly impressed lenders, and 59% of respondents believed that these indicators do not represent the return of strong growth. Moreover, a significant percentage of the respondents remain concerned with the potential volatility of the healthcare and retail industries, which are two of the more critical industries that drive growth. Forty-nine percent of lenders believe that the healthcare industry will experience the most volatility, representing a six percentage point increase from the prior quarter.

The positive economic trends and the optimism expressed by lenders both continue to increase, an indication of lenders’ faith in continued economic growth and stability.

Economic Outlook Jumps Up

One of the questions in the survey asked lenders to grade how they believe the U.S. economy would perform over the next six months (near-term). The survey also asked how they believe it would perform beyond the next six months (long-term). We use this information to calculate an economic grade point average (GPA) for the expected performance of the U.S. economy for each time period.

The near-term and long-term GPA for the U.S. economy continued to improve in Q2 2014. The near-term outlook jumped by eight basis points to 2.24, while the long-term outlook jumped by nine basis points to 2.33. Even though both GPAs remained at the “C” level, there was a 14% shift towards a “B” level in the near term and an 18% shift towards a “B” level in the long term. When the GPA is observed on a year-over-year basis, both the near-term and long-term economic outlook grew at the highest level since early 2010. The near-term GPA for the U.S. economy grew from 1.85 in Q2 2013 to 2.24 in Q2 2014, representing a 21% increase year-over-year. The long-term grade for the U.S. economy grew from 1.98 in Q2 2013 to 2.33 in Q2 2014, representing an 18% increase year-over-year.

Consistent Outlook for U.S. Economy

The differential of the near-term and long-term GPA sheds light on perceived stability of the economy. Over the past five years, the differential between the near-term and long-term GPAs has steadily decreased, which implies economic stability, improved near-term performance and/or a tempered view of long-term performance. The first and second quarters of 2014 GPA differentials were the lowest in the past five years at 0.09, and 0.08, respectively. In early 2009, the GPA differential was 0.84. The narrowed differential demonstrates stability and the fact that lenders expect the U.S. economy to remain relatively steady in the foreseeable future.

Steady Positive Outlook for Commercial Lending

One of the questions posed to survey respondents is if they believe commercial lending will be up, down or remain at the same level over the next six months. The question drills down further into specific lending sectors, which includes small business, middle market, large corporate and international lending.

At Phoenix, we use a metric to measure lender sentiment called the Diffusion Index, which is the percentage of positive expectations less the percentage of negative expectations. The Diffusion Index across all lending sectors was consistent with the previous quarters at 45%. Additionally, there was a three percentage point increase in lenders who believe domestic lending will increase, which was the highest reading for an increase in this segment since Q2 2011. Forty-one percent of respondents view the entire lending universe as improving compared to 32% of respondents in the previous quarter.

Increased Competition for Quality Borrowers

Despite the stable and optimistic outlook of the U.S. economy and domestic lending, there remains a high level of competition for quality loans, which makes it a great time to be a borrower.

The survey asks lenders to indicate the highest senior debt to EBITDA leverage ratio that their banks would consider. The percentage of lenders who said that their institutions would consider a senior debt to EBITDA leverage ratio greater than 3.5x (the highest threshold in our survey) dropped from 23% in Q1 2014 to 12% in Q2 2014. This reduction could be our first evidence a rationalization or modest pull back on the part of lenders.

Another survey question probes lenders about the anticipated changes of their interest rate spreads (increase, maintain and reduce). Only 1% of respondents anticipate increasing their credit spreads over the next six months (down 11 percentage points), which is the lowest level ever recorded in the survey. A majority of lenders anticipate that they will maintain their current interest rate spread, but 28% expect a reduction in lending spreads, an eight percentage point increase when compared to the previous quarter. This suggests to us that competition for quality loans will likely remain fierce for the remainder of the year.


The results of our Q2 2014 survey indicate that, despite a few signs of caution, lenders are becoming increasingly optimistic about the U.S. economy and commercial lending on a near-term and long-term basis. The survey showed steady and consistent improvement across many of the metrics quarter-over-quarter. The alignment of our survey results with the U.S. economic output indicates that lenders continue to feel comfortable about the prospects of their borrowers.
We are eager to see the results of Q3 2014 survey, as the Federal Reserve concludes the tapering of its bond purchasing program, to see how institutions plan for the inevitable increase in interest rates in the coming years.

Michael E. Jacoby is a senior managing director and shareholder at Phoenix Management Services. He has served in advisory capacities, as well as interim management positions for more than 220 Phoenix clients in a wide variety of industries since joining Phoenix in 1992. He can be reached at mjacoby@phoenixmanagement.com.

Jack Murdoch is an analyst with Phoenix Management Services and can be reached at jmurdoch@phoenixmanagement.com.

The Phoenix Management “Lending Climate in America” Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. To see the full survey results, visit http://www.phoenixmanagement.com/survey/.