A growing number of smaller lenders say they are bracing for an expected rise in bankruptcies and loan losses by paying closer attention to credit quality, according to a quarterly survey.
The Phoenix Management Services Inc. survey, which could be released as early as today, indicates that lenders - most of which reported an average loan size of $10 million or less - are preparing themselves for an economic downturn.
The proportion of lenders planning to tighten loan structures has risen, according to the survey of 96 commercial banks, finance organizations, and factors. Lenders are likely to be less flexible on items such as collateral, guarantees, advance rates, and loan covenants.
For loans of $1 million to $5 million, 45% of lenders said they intend to tighten structures, up from 18% in the first quarter. Responses were similar for other loan ranges: $6 million to $10 million, 40% planned to tighten, up from 22%; $10 million or more, 44%, up from 24%.
"Life has been good for the last six, seven, eight years in terms of the economy," said Michael Jacoby, executive vice president of the Philadelphia consulting firm. "So what the banks are sort of saying is, 'I'm going to prepare myself for what's likely to be an economic downturn.' "
Eighty percent of the respondents expect bankruptcies to rise, compared with 62% who gave this answer last quarter. In addition 82% of lenders said they expect loan losses to rise, up from 71% last quarter.
The health-care industry continues to be an unpopular borrower; eighty-five percent of lenders ranked it as the least attractive of 16 sectors named. This is the fifth consecutive quarter that health care has brought up the rear on Phoenix's list of potential borrowers.
The darlings among lenders continued to be light manufacturing (named by 83%), industrial distribution (73%), and service (68%).
This month Wachovia Corp. of Winston-Salem, N.C., Unionbancal of San Francisco, and Pacific Century Financial Corp. of Honolulu said problem loans were forcing them to issue profit warnings. Wachovia and Unionbancal attributed part of their problems to exposures to syndicated loans.
"I think what happens in these cases of syndicated loans, because they're larger and because they're generally paid to companies that are more newsworthy, [they] get all the press," said Mr. Jacoby. "Meanwhile, the same problems exist throughout your hierarchy of loan sizes."