Big loans are not the only ones getting extra scrutiny these days.
In the latest quarterly lending survey by Phoenix Management Services, middle-market lenders, citing weakening economic conditions, said they planned to tighten loan structures including collateral requirements, guarantees, and covenants for credits bigger than $6 million.
The results reinforce findings by the Federal Reserve Board that were published this week. The Feds survey of senior loan officers found that banks are tightening lending standards at the fastest pace in a decade and that lenders are charging more to extend credit to riskier borrowers.
The Phoenix survey, done in the fourth quarter by the Philadelphia consulting firm, said 53% of lenders planned to tighten standards on loans of $6 million to $10 million in the first quarter and 55% said they would tighten standards on loans bigger than $10 million. Standards for smaller loans would remain the same as in the fourth quarter, according to the survey.
That said, smaller loans would have higher interest spreads. Fifty-one percent of survey respondents said they planned to increase the spreads they get for loans of less than $5 million.
Phoenix contacted 82 financial institutions by mail for the survey 42 commercial banks and 40 commercial finance companies or other commercial lenders.
Not surprisingly, 94% of respondents said they expected loan losses to grow in the first six months of 2001, and 91% said they expected bankruptcies to rise.
But more than two-thirds of the respondents said they expected lending to middle-market companies and small businesses to increase in the first quarter. This contradicts part of the Federal Reserve study, also conducted late in the fourth quarter, which indicated that loan demand would fall this year as businesses scale back spending and acquisition activity.
It is also in contrast to Phoenixs third-quarter survey, where half of the 73 banks and other lenders that responded predicted loans to small companies would drop in the fourth quarter. Fifty-one percent said they expected lending to middle-market companies ($50 million to $250 million of revenue) to drop, and 43% predicted a decline in lending to companies with more than $250 million of revenue.
Health care, which was the bogeyman to lenders last year, was at the top of the list of least attractive industries, according to Phoenixs fourth-quarter survey. Sixty-nine percent of respondents ranked it as the least attractive industry to lend to, followed by startups and new ventures, retailers, construction companies, and technology firms.
Light manufacturing was named by 83% of respondents as the most attractive industry segment to lend to, followed by industrial distribution, service companies, heavy manufacturing, real estate, and transportation.