Lenders Take Dim View of Auto Industry, with Nearly 90 Percent Predicting 'Flat' or 'Weak' Sales for Big 3, According to Phoenix Lending Survey Results; Half of Lenders Say Cost-Cutting Should Be #1 Priority If Big 3 Want to Return to Profitability

Business Wire, Sept 15, 2005

PHILADELPHIA -- E[acute accent]Nine of Ten Lenders Would Worry About Loan Made to A Supplier with Exposure to Big 3

E[acute accent]One-third of lenders nationwide expect sales for the Big 3 automakers and their North American suppliers to be weak over the next six months, according to the results of this quarter's Phoenix Management "Lending Climate in America" Survey. And half of lenders said sales would remain "flat," underscoring ongoing concern over the health of the American auto industry. E[acute accent]When asked to identify the single most important step the auto industry could take to return itself to profitability, 54 percent of lenders said successful cost-cutting initiatives by the Big 3 were most needed. Twenty-nine percent said the introduction of new, more energy-efficient models that can compete with Asian automakers was required. Six percent said a change in management was needed, and three percent said a federal energy strategy that mandates the production of more fuel-efficient cars was necessary to return the Big 3 to profitability. E[acute accent]Eight percent of lenders believe that there are no steps that can be taken to return the Big 3 to profitability. E[acute accent]"The American auto industry and its supplier base are in the midst of a major restructuring, and that has lenders nervous," said E. Talbot (Tal) Briddell, Managing Director of Phoenix Management Services. "High prices for steel and other raw materials, rising health and labor costs, increasing competition from overseas, and now the sky-rocketing fuel prices in the wake of Hurricane Katrina have slammed U.S. automakers and their suppliers. Lenders are understandably concerned about the potential for failure and believe the auto industry needs to take steps to revitalize itself before it's too late." E[acute accent]Nine out of ten lenders said their financial institution would feel concern about making a loan to an automotive supplier with exposure to GM, Daimler Chrysler or Ford - but it would not necessarily preclude them from making the loan, if asked. Six percent said the state of the auto industry would play almost no role in their financial institution's evaluation of the loan request, but two percent said their institution would turn the request down outright because of the auto industry's problems. E[acute accent]Lenders expect the economy to perform at a "C" grade level during the next six months, the lowest short-term grade they have assigned the economy in eight quarters. Forty-six percent of lenders predicted bankruptcies would rise, up from 40 percent last quarter. But they were more optimistic about the job market, with only 18 percent predicting a rise in unemployment, compared to 30 percent last quarter. E[acute accent]"With the new bankruptcy laws taking effect this fall, it is not unexpected for lenders to be more concerned about a possible spike in bankruptcies," Briddell noted. E[acute accent]Less than a quarter of lenders predict any significant expansion plans by their customers in the next six to 12 months. Twenty-one percent said their customers planned to make new capital investments, 19 percent said their customers intend to make an acquisition, and 16 percent, each, said their customers planned to raise additional capital or introduce a new product or service. Fifteen percent said they planned to hire new employees. Only thirteen percent said their customers would be entering new markets in the coming year. E[acute accent]Lenders reported moderate growth expectations for their customers. Only four percent said their customers expected strong growth in the coming six to 12 months, down from nine percent who said the same last quarter. Ninety percent of lenders said their customers anticipated moderate growth, up from 84 percent last quarter. Six percent said their customers anticipated no growth, similar to the seven percent who said the same last quarter. E[acute accent]When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than two years - Light Manufacturing (78 percent), Industrial Distribution (70 percent) and Service Companies (70 percent). E[acute accent]Start-ups/New Ventures were deemed the least attractive industry to lend to, with 67 percent naming it unattractive. E[acute accent]Roughly 80 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories, although one out of five lenders said they planned to tighten their loan structure in the under $1 million category. E[acute accent]A majority of lenders reported plans to maintain their interest rate spread and fee structures on similar credit quality loans, except for the under $1 million loan category, where 36 percent of respondents said they planned to increase the interest rate spread and fee structure. E[acute accent]Nearly all lenders expect the Fed to raise rates in the coming six months, with more than half predicting a half-point hike.