As we reviewed the results of the Amherst Partners 2nd Annual Lender Survey, we were struck by two headlines that sum up our perspective on the economy really well. The first was 3.2% GDP growth in the economy in the first quarter, which blew the top off of the expectations. The other, which was not so widely followed, was the earnings decline of several major Tier 1 auto suppliers: Lear was down 29%, Visteon was down 78%, and Borg Warner was down 35%. This was definitely not a strong signal for economic growth.
And this dichotomy was mirrored precisely in what the respondents to our survey told us. Some participants are seeing a very stable economy and others are think the tide is going out. We have record unemployment, a stock market that is hitting all-time highs, low interest rates/inflation, and strong consumer sentiment. Conversely, there is the ongoing threat of a trade war with China, low growth in the rest of the world’s economy, an unresolved Brexit, rising energy prices, and a significant degree political uncertainty in the United States.
From our perspective, the M&A markets have remained very robust. There is a lot of capital available for transactions, but the market does not seem as frothy as it was in 2018. Closed M&A transactions in the middle market in the 1st quarter of 2019 were down 17.9% from 2018. Note, 2018 was a record year in terms of the number of transaction by private equity companies.
But we are also seeing a big pickup in workout activity. While commercial bankruptcies are essentially flat from last year for the 1st quarter, we and many of our colleagues are seeing more companies in trouble with their lenders.
Let’s look at the data from the survey.
Over 80% of the respondents work at either a regional bank or a national bank. Approximately 40% are at institutions with $10-$100 billion in assets, 28% are with institutions with assets between $100 -$250 billion and 20% are at institutions with assets over $250 billion. Over 90% of the respondents are from the Midwest.
In terms of growth, 77% of the respondents said that their institution’s economic outlook is expecting limited growth in 2019 compared to 2018. And about the same amount (69%) expect that their own institution will have limited loan growth in 2019.
In regards to loan quality, approximately 45% of the respondents stated that the quality of their loan portfolio has not changed. Keeping with the theme that it is hard to determine which way the wind is blowing, 32% said that the quality of their portfolio is slightly or strongly improving and 22% said the quality of their portfolio is decreasing.
While there is a slight bent towards an increasing quality in the portfolio, the credit markets are tightening. 43% of the respondents said that their institution is slightly tightening credit standards with only 16% of the respondents stating that their institution is expanding or slightly expanding credit standards. This lines up with the expectation that the loan quality has peaked. 28% of respondents expect their institution’s loan quality to somewhat decrease. 21% expect an increase in quality. 51% expect the quality to remain the same.
In terms of the overall lending landscape, 36% of the respondents said that their competition is somewhat aggressive and 58% said the competition is significantly aggressive, with 78% saying that the aggressiveness of their competition will negatively impact their ability to win business in 2019.
Not surprisingly, the industries most predicted to contract in 2019 are Consumer Products, Retail, and Transportation. Industrial and Healthcare were indicated as mostly likely to experience growth in 2019.
The survey results line up to what we see going on in the marketplace. According to data published by SPP Capital, lending multiples are coming down slightly in the leveraged loan market by approximately ¼ – ½ times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and pricing is inching up slowly.
In summary, while the economy on an overall basis is still doing very well, there are some cracks below the surface that are causing some concern. The respondents to our survey indicate that there is a lot of capital available to finance companies, but that the lending conditions and the quality of their portfolios will continue to tighten.
Based on all of this data, we believe that the economy can continue to do well if interest rates stay low, which implies low inflation, and that there are no geo-political events that trigger a sudden and dramatic change in sentiment.
The firm would like to extend a thank you to all the lenders who shared their insights in this year’s survey. A reminder to anyone who did not have a chance to participate but who would like to receive an invitation, you can subscribe to our mailing list through our website to be included in the 2020 edition. Survey respondents do receive a copy of the results.
Insights provided by:
Partner and Co-Founder