Philadelphia May 25, 2001 Dot-coms seeking start-up capital and technology companies looking for loans to sustain them through the current economic downturn got some bad news today with a national survey showing U.S. lenders reluctant to write checks for potential borrowers in these sectors.
In the latest quarterly Phoenix Lending Survey, 73 percent of responding lenders named start-ups and new ventures as unattractive loan candidates, taking over the mantle of "least attractive industry" from healthcare, which had held the title for five quarters.
Healthcare ranked second least favorite, with 66 percent of lenders naming it unattractive, while third-ranked technology sector experienced a dramatic increase in perceived unattractiveness, with 57 percent reporting it was an industry to which they would not lend, compared to 42 percent last quarter.
"The dot-com fallout continues," said E. Talbot Briddell, president of Phoenix Management Services, which conducts the surveys. "Lenders have been stung, and we're seeing their displeasure in the increasingly negative attitude they are showing toward technology and start-up companies."
Briddell said the first hint of this trend came a year ago, while e-commerce was still hot. "Exactly a year ago, at the height of the Internet boom, lenders participating in the Phoenix Lending Survey predicted start-ups would not be able to obtain financing by this time this year," Briddell said, adding, "They couldn't have been more 'on the money' in their prognostication."
But the tech sector is not alone in its sudden inability to get a date with lenders. The survey reported that, with two-thirds of commercial lenders believing the current economic slowdown will drag into 2002, they are turning a cold shoulder to borrowers of all sizes.
Sixty percent of all respondents to the quarterly survey said the current economic downturn would end sometime in 2002, with 39 percent predicting it would end in the first half of the year, and 21 percent saying it would last until the second half of 2002. A more optimistic 37 percent of lenders said the downturn would end during the second half of this year.
In response, roughly two-thirds of lenders said lending to the small business, middle market and large corporate markets would be down in the next six months. Expected to be hardest hit are middle market companies, defined as those with revenues of $50 million to $500 million. Seventy-two percent of lenders said lending to this segment would be down, compared to 19 percent who said the same last quarter.
"Last quarter, lenders were more optimistic about the economic outlook for the remainder of 2001," said Briddell. "Flash forward three months: The depth and stubbornness of this downturn is causing lenders to re-evaluate their outlook. They believe we are in a sustained downturn, and they are slamming the doors on borrowers and holding on to their money."
Briddell noted that most lenders said they would increase the interest rate spread on loans, concurrent with their expectation that the Fed will continue to slash rates. "This could suggest that commercial lenders do not plan on passing on every Fed rate drop to their customers."
Lenders' pessimism was also evident in their predictions of customers' growth in the next six to 12 months. Sixty-four percent of respondents said their customers expected "moderate" growth, while a significant 33 percent triple that of last quarter said their customers expected no growth in the coming year.
The only bright spots in the borrowing sector were light manufacturing and industrial distribution, which 79 and 75 percent of lenders, respectively, named as industries that were attractive to their lending institution.
Lenders plan to continue tightening loan structures on various sized loans, an indication that they anticipate the economic slowdown to continue. Loan structure refers to a range of requirements lenders attach to a particular loan, such as collateral requirements, guarantees, advance rates and loan covenants.
Ninety-eight percent of respondents said the Fed would cut rates further, with 60 percent predicting a rate cut of a half-point.
The Phoenix Lending Climate in America Survey is conducted quarterly gauge shifts in lenders' attitudes. Lenders from commercial banks, commercial finance companies and factors across the country are surveyed each quarter. Eighty-five lenders participated in this quarter's survey.
Phoenix Management Services is a Philadelphia-based turnaround management firm that assists companies encountering financial, operating or management.
