Each quarter Phoenix Management distributes its proprietary “Lending Climate in America” survey to over 2,000 lenders nationwide. In the prior two quarters (Q1 2012 and Q4 2011) we saw significant improvement in nearly all of the lending survey metrics, including improving economic trends, relaxed credit facility structures, and accelerating customer growth plans.  While overall lender sentiment remains near recent survey highs, results from our most recent survey (Q2 2012) reveal a tempering of lender enthusiasm.

According to this quarter’s survey, lenders identified political uncertainty as their chief concern regarding future economic growth. The presidential election in November was cited by 30 percent of respondents as the biggest hurdle in achieving positive economic growth and the United States fiscal budget concerns were cited by 21 percent of respondents as a leading issue with the potential to inhibit short term GDP growth.  On a micro level, lenders showed less optimism for opportunities of their borrowers, indicating a slight pullback in their own customer’s growth expectations and a reduction in new capital investments and hiring expectations when compared with prior quarter totals.

The most recent survey did have some bright spots. Small business lending in particular appears poised for continued growth, with 44 percent of the respondents expecting loans to small businesses to increase throughout 2012, while 47 percent expect lending in this segment to remain stable and only 5 percent expect contraction.  Longer term, survey respondents were more optimistic towards improved future economic performance than in prior quarters.

Leverage has Declined, but the Outlook is Less Restrictive

Arguably one of the most important financial metrics loan underwriters review is a borrower’s senior debt to EBITDA ratio. Survey respondents were asked how they viewed this multiple when considering a new loan request, and the results indicate that aggressive lending at the highest leverage multiple remains consistent, and further suggests that in general, lenders are tightening the maximum leverage multiple based on concerns about the economy and the cash flow generating ability of their borrowers.  Although 12 percent of respondents indicated that their financial institution would consider a loan request with a leverage multiple greater than 3.5x (unchanged from Q1), only 5 percent would consider a loan request with leverage in the 3.0x – 3.5x range, which is a dramatic reduction from the whopping 45 percent in Q1.  As further evidence of this reduction in leverage, the majority of respondents – 51 percent, indicated that a leverage multiple of 2.5x – 3.0x was the highest ratio their financial institution would consider in conjunction with a financing request, compared with only 16 percent in Q1.

According to the survey, there appears to be some modest upward bias in leverage through the end of the year, as the majority of respondents (65 percent) anticipate that the maximum senior debt to EBITDA ratio at their financial institution will not change during the next six months. Five percent indicated the ratio would increase by more than 0.5x and 16 percent indicated the ratio would increase by less that 0.5x, while only 2 percent predicted a drop of less than 0.5x during the next six months.

Lenders are More Optimistic about New Markets and New Products, but More Pessimistic about Capital Investments and Hiring

Lenders believe their customers are more likely to enter new markets, introduce new products and raise additional capital in the next six months based on this quarter’s survey results. 35 percent of respondents felt their customers would be entering new markets; this is compared to 28 percent of total responses to the same question last quarter. Survey results also indicate an increase in expected customer new product introductions. This quarter 42 percent of lenders indicated their borrowers would be launching new products compared to 39 percent in the prior quarter.  Complimenting new product activity, lenders also feel that there is an increased likelihood of raising additional capital.  26 percent of total respondents feel their customers will be participating in financing activities compared to 22 percent last quarter.  Lender’s felt less confident that their clients will be making new capital investments (44 percent this quarter compared to 50 percent last quarter).  Responses this quarter were virtually identical with regard to merger and acquisition activity, as 37 percent of survey takers believe their customers will be making an acquisition in the next six months, compared to 36 percent in last quarter’s survey.  Somewhat troubling this quarter, total responses suggested a decrease in expectations for customers making new hires. This quarter’s results had 35 percent of total respondents feeling confident about future new hires compared to a slightly higher percentage last quarter, 38 percent.

Near Term Economy GPA Falls Below Passing Level

For each survey, we calculate a weighted average response to the question “How do you expect the United States economy to perform during the next six months on a scale of A through F?”.  The economic grade point average in our Q2 2012 survey fell nearly 0.2 to 1.91, which is a “C-”.  These results showcase renewed concern about macroeconomic performance over the next six months, however the grade does remain near recent survey highs, demonstrating just how tenuously lenders view our economy.  This quarter 2 percent of respondents selected an “A” level, compared with zero respondents last quarter.  Only 9 percent of respondents indicated a “B” level compared to 17 percent last quarter. The majority of survey takers, 65 percent, gave the economy a “C” grade for the next six months; these results represented a 9 percentage point decrease from last quarter. The remaining responses, 23 percent of the total, were in the “D” grade level, an increase over last quarter by 14 percentage points.

Optimism Remains on the Horizon

As a follow up to the previous question, respondents are asked how they would rate the United States economy beyond the next six months.  The overall economic GPA was 2.3 or a “C” level for performance expectations beyond six months.  This quarter’s results offer a slight improvement of approximately 0.1 compared to the first quarter’s weighted average of 2.21.  Furthermore, the 0.39 point gap between the economic GPA beyond six months and the economic GPA during the next six months is more than 3x the 0.12 point gap in the Q1 survey.  We believe this widening gap reflects the trepidation surrounding the presidential election in November and the belief that the U.S. economy will experience a more robust recovery once there is political clarity.  No lenders believe the economy will perform at an “A” level during this longer time period.  Last quarter only 2 percent of those polled felt an “A” level of future performance would be achievable.  Lenders who feel long term performance deserves a “B” grade increased three percentage points from last quarter to 37 percent of responses. Similar to the near term economic question’s results, the majority of lenders believe economic performance will maintain a grade of “C”. This quarter saw 58 percent  of survey takers choose the “C” performance grade compared to 48 percent last quarter. The “D” level saw a significant reduction in survey response, 3 percent this quarter, down 11 percentage points from last quarter.  The lowest grade, “F”, received the same 2 percent of responses as last quarter.


Results of our Q2 2012 survey indicate that lenders are less optimistic about the economy than they have been recently.  The maximum senior debt to EBITDA leverage ratio suffered a slight retraction from 3.0x – 3.5x to this quarter’s most popular choice of 2.5x – 3.0x, and lenders believe that the current leverage ratios will remain the norm for the next six months with a slight bias to increase.

Lender expectations regarding customer growth increased this quarter in three areas:  entering new markets, introducing new products, and raising additional capital. The largest jump occurred in the number of lenders anticipating their customers entering new markets.  These growth expectations were somewhat offset by pessimistic feelings on employment, as lenders are less confident regarding their customers hiring new employees this quarter (relative to last quarter), and more respondents believe unemployment will remain constant (rather than decrease as they indicated in Q1 2012).

Continuing with the macroeconomic theme, this quarter’s survey resulted in an economic grade point average of 1.91 – a “C-”, and a decline from the “C“ grade in our Q1 survey, demonstrating lenders diminished beliefs about near term domestic performance. The longer term overall economic GPA improved to 2.3 – a “C” letter grade, up from the 2.21 posted last quarter, reiterating the expectation of our respondents for accelerated economic expansion in 2013.

The Phoenix Management “Lending Climate in America” Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy.  To see the full results of Phoenix’s  “Lending Climate in America” Survey, pleasure visit http://www.phoenixmanagement.com/survey/.  For over 25 years, Phoenix has provided smarter, operationally focused solutions for middle market companies in transition. Phoenix Management Services™ provides turnaround, crisis and interim management, specialized advisory and operational due diligence services for both distressed and growth oriented companies. Phoenix Capital Resources™ provides seamless investment banking solutions including M&A advisory, complex restructurings and capital placements. Phoenix Capital Resources is a U.S registered broker-dealer and member of FINRA and SIPC. Proven. Results. If you would like to learn more about Phoenix please visit http://www.phoenixmanagement.com/ or http://www.phoenixcapitalresources.com/.

Michael E. Jacoby (mjacoby@phoenixmanagement.com) is a Senior Managing Director of Phoenix Management Services, and is a skilled financial executive with extensive operating, turnaround and commercial banking experience.   He has served in advisory capacities as well as interim management positions for more than 190 Phoenix clients in a variety of industries. He has also been instrumental in assisting numerous clients with their financing and divestiture needs.   Bradley Test (btest@phoenixmanagement.com) is an Analyst with Phoenix.