Lenders Worry About SME Debt Levels

Firms that lend money to mid-sized businesses in the U.S. are growing worried about the levels of debt these companies have compared to a year ago.

Citing a survey by Carl Marks Advisors, Reuters reported that lenders who offered attractive terms to mid-sized business borrowers could see their loan portfolios suffer. The firm said the increased debt levels are the result of a highly competitive market in which lenders were more willing to offer lenient loans.

The survey revealed that 76 percent of those polled are more concerned about the leverage levels of middle market companies in the U.S. than they were at the start of last year. “In 2017, many a transaction has added debt, but there has not been a lot of value created,” said Joseph D’Angelo, a partner at Carl Marks Advisors. “There are not a lot of unencumbered assets left to borrow more money against. If a company doesn’t perform through that, it will likely see a restructuring.”

The survey also showed that of those polled, 48 percent said they think the loan documents they created last year were less restrictive to borrowers than the loan documents that were executed right after the financial crisis of 2007 and 2008. Meanwhile, 35 percent of survey respondents said they don’t think the loan documents are any less restrictive than in the past, while 17 percent signaled they are uncertain.

“There is a fully functioning credit market and pressure to deploy capital remains robust,” noted Patrick Flynn, managing director at Carl Marks Advisors, in an interview with Reuters. “It’s hard to predict what will trigger the pendulum back towards lender-friendly terms. Currently, it seems that lender pushback is still being solved with price and terms.” Flynn noted that while there is more concern about loans this year than at the start of 2017, that doesn’t mean a contraction is coming any sooner.