Volatile Industry Analysis
Respondents were asked to select three industries they believe will experience the most volatility (e.g., Chapter 11 filings, mergers and acquisitions, declining profits, etc.) over the next six months. The industry that showed the most volatility from the lenders’ perspective during 2013 was the Healthcare sector. Obviously, the implementation of the Affordable Care Act (“Obamacare”) did not go as smoothly as the White House would have hoped. There were the glitches in the website, Healthcare.gov, in addition to issues regarding the mix of enrollees, as the early results indicate a lower than forecast percentage of younger, healthier participants. Lenders chose Healthcare as the most volatile industry in Q2/13 survey, garnering 59% of the responses, but this number has subsided in recent surveys. As of the Q4/13 survey, only 37% of respondents chose the Healthcare industry to be the most volatile over the next six months. This indicates lenders may be buoyed by some recent clarity regarding funding requirements, and/or believe the darkest days for Obamacare are behind us.
Another industry that grabbed our interest was the Public Administration category. Ranked as the 3rd most volatile industry in our Q1/13 survey, it steadily decreased throughout the year to finish as the 8th most volatile in the Q4/13 survey. 2013 started the year off with worries about the budget sequestration’s potentially broad impact on the public sector. However, as the economy continues to improve, the budget cuts mandated by sequestration appear to have been absorbed by our economy, and the negative effects have largely dissipated.
Interestingly the retail sector finished the year ranked as the most likely industry to experience volatility in the next six months, accounting for 54% of the responses. According to the Retail Federation, holiday sales were up 3.8% versus expectations of 3.9% going into the season. E-commerce was a bright spot of the season while big box retailers struggled, specifically in the apparel space. We believe lenders’ concerns are concentrated on the continued migration of consumer spending into the e-commerce space, which will likely continue to accelerate in 2014.
Bankruptcies and Loan Losses
As a turnaround firm, we are keenly interested in our lenders’ opinions on Bankruptcies and Loan Losses. As you may have suspected, lenders’ expectations for an uptick in both categories fell off a cliff in 2013. At the end of Q4/12, slightly more than 20% of the lenders surveyed believed there would be an uptick in Bankruptcies and Loan Losses within the next six months. As the prior sections have highlighted, it is no secret that the economy has gained more stable footing in addition to interest rates remaining at historically low levels. However, the numbers are overwhelming when only 5% of lenders surveyed in our Q4/13 survey expect Bankruptcies and Loan Losses will increase within the next six months. This sentiment will likely bode well for more aggressive lending in 2014.
Conclusion
As we looked back at our 2013 "Lending Climate in America" surveys, we would like to give a hand to the lenders that participated for their work, and not just because their efforts benefit charity. Their forward looking responses closely matched the economic events that unfolded. The institutions they represent (mostly commercial banks) are healthy and looking to lend. It is worth noting that lenders largely maintained their expectations for modest growth in loans during 2013. Loosening credit markets, mixed with modest loan growth indicate that lenders expect it will remain a borrower’s market for at least the first half of 2014.
Where we go in 2014 is still anyone’s guess. If you believe the economist and stock futurists, a 4% increase in GDP and 10% increase in the equity markets are what we are to expect. This situation would surely bode well for the lending environment. However, many pundits believe that the economy remains fragile and the employment picture remains bleak. Check back with our Quarterly ‘Lending Climate in America’ for our analysis as the year unfolds.
Authors' Note:
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/.