Report: Gloomy Lenders and Macroeconomic Factors
Inflation, bank closures and ongoing interest rate hikes. These and other macroeconomic factors prompted respondents to a recent survey conducted by FTI Consulting Inc. toward “the most cautionary outlook seen in the five years that FTI Consulting has conducted the survey,” according to a press release from the company.
According to the results, 71% of those surveyed believe the U.S. will end up in recession in 2023 or 2024. Furthermore, 74% of respondents indicated that the Federal Reserve “will continue to increase its base interest rate for much or most of 2023.”
Survey respondents also indicated that:
- Credit-market conditions will continue pulling back or contracting in 2023, with wider pricing spreads and restriction on credit availability
- Loan underwriting standards will tighten even further; no respondents said that lending standards will loosen in the year ahead
- Loan defaults and workout activity will be higher in 2023 compared to 2022
The survey also pointed to common concerns among lenders contending “with prior tax lending standards and loose credit-documentation terms,” according to the report’s release. Additionally, respondents felt that retail would be the sector most likely to experience distress over the next 12 months, with real estate and REITs behind it.
“Unlike previous years, a large majority of respondents expect leveraged loan underwriting standards will be more restrictive in the year ahead,” said Chuck Carroll, a Senior Managing Director and Leader of the Senior Lender Advisory practice at FTI Consulting in the release. “Nonetheless, lenders will have to contend with the consequences of years of loose lending standards that can provide struggling borrowers with financing maneuvers that subvert conventional lender protections and diminish collateral strength as the economy further weakens.”
Dave Katz, a Senior Lending Manager in FTI Consulting’s Senior Lender Advisory practice said in the release that a gloomy economic outlook for the U.S. economy has been ongoing for the past couple of years. “The responses in this year’s survey are consistent with recent dialogue we have had with our lender clients and contacts, with recession concerns and credit tightening risks amplified by the recent bank failures,” he added.