Phoenix Management’s Lending Survey Reveals Credit Ratings Declined for Most Lenders in Q4/23

Phoenix Management, a part of J.S. Held, released the results of its Q4/23 “Lending Climate in America” survey, which asked lenders how the credit ratings in their portfolios changed from Q3/23 to Q4/23. Overall, a majority of lenders (83%) signified a decline in credit ratings, with 67% of lenders indicating a slight decline and 17% indicating a more-than-slight decline. The other 17% experienced no material changes in the credit ratings of their portfolios during Q4/23.

When asked when they believe the Federal Reserve will begin to cut interest rates, all the surveyed lenders said they believe decreases will begin at some point in 2024. However, 42% of the lenders believe rate cutes will occur in the first half of 2024, while the other 58% believe the rate cutting will not begin until the second half of 2024.

Additionally, Phoenix’s “Lending Climate in America” survey asked lenders to identify which macroeconomic headwind is most concerning heading into 2024. Of the lenders surveyed, 33% indicated the looming debt crisis is the most concerning, while 25% identified a U.S. recession as most concerning. Policy (interest rate) risk and election/political uncertainty each garnered 17% of the responses. The remaining 8% identified geopolitical risk/war as the most concerning macroeconomic headwind.

Lender optimism in the U.S. economy remained the same in the near term at 1.75% in both Q3/23 and Q4/23. According to the survey, 75% of lenders believe the economy will perform at a “C” level during the next six months, while 25% believe the economy will perform at a “D” level. Lender expectations for the U.S. economy’s performance in the longer term decreased significantly from 2.5 to 2.08. Of the lenders surveyed, only 25% believe the U.S. economy will perform at a “B” level during the next 12 months, half the percentage from the prior quarter.

“Lenders significantly reduced their longer-term expectations for the U.S. economy despite 100% unanimity on interest rate declines in 2024 and meaningfully higher expectations of their customer for hiring, raising additional capital and making capital improvements and acquisitions” Michael Jacoby, senior managing director of Phoenix Management, said. “Lenders expressed concern regarding the looming debt crisis and a potential recession, and perhaps most telling, the diffusion index for commercial lending (where a score of zero represents an expectation for stable lending over the next six months) declined to -83%, which is the lowest score ever recorded. Lenders are clearly concerned with the economy. They expect increases in loan losses, bankruptcies and unemployment. 80% of respondents indicated credit ratings have declined in their portfolios, and as a result, we expect to see a tightening of loan structures, more attention to portfolio management and earlier identification of potential problem loans.”

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Terry Mulreany
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