Credit Conditions for SMEs Improved Prior to Market Downturn, Finds Greenwich Associates

The Greenwich Associates Credit Availability Index for mid-sized companies pushed into positive territory last quarter for the first time since the second half of 2007. Unfortunately, that long-awaited positive turn occurred at a moment when corporate loan demand appears threatened by new concerns about a flagging economy that could cause small and medium-sized enterprises (SMEs) to put any expansion plans on hold.

Since approximately the mid-point of 2009, US companies have been telling Greenwich Associates a consistent story: credit conditions are hardly favourable, but they are improving. Over that two-year period, the Greenwich Credit Availability Index has reflected a gradual movement toward something close to ‘normal’ in terms of corporate borrowing.

The index provides a glimpse into business’ recent experiences in applying for and obtaining bank loans. The index score represents a net calculation based on companies’ response to the question: Is it harder or easier to borrow money than it was three months ago? A positive score indicates that credit conditions have eased or improved over the past quarter, a negative score reflects tightening or deteriorating credit conditions.

In July 2011, the Credit Availability Index for mid-sized companies moved solidly into positive territory. The index score for small businesses fell just short of a positive reading while posting its strongest results since 2007. These results reflect a dynamic that companies have been describing to Greenwich Associates for more than a year: banks have been lending – at times aggressively – to the largest and most creditworthy companies in the middle market space. While weaker middle market companies and most small businesses remained frozen out of the bank loan market throughout the early stages of the post-crisis period, in more recent months these smaller companies have found loan access much improved.

“Since the credit crisis, there has been much debate about what has been slowing the rebound in bank lending to small businesses and mid-sized companies: has it been banks’ refusal to lend, or a lack of corporate demand?” said Greenwich Associates consultant David Fox. “We now have strong evidence that, as of July 2011, companies were gaining confidence in their ability to obtain bank credit. But as markets enter yet another phase of volatility, it seems very likely that demand will come under renewed pressure.”

Optimism Imperilled?

Prior to the S&P downgrade of the US credit rating and subsequent equity market gyrations, companies were expressing increasing levels of optimism about the economy. Post-crisis optimism among middle market companies peaked at the end of the first quarter of 2010, at a time when it appeared to most observers that an economic recovery was taking hold. Shortly thereafter, sentiment – as measured on the Greenwich Optimism Index for mid-sized companies – nosedived, reaching negative territory later that year. Optimism among small businesses peaked in July 2010 before plunging into negative territory just a few months later.

Since roughly November 2010, sentiment readings among SMEs have been slowly grinding higher. Despite negative economic data, the protracted stand-off over the US debt ceiling and dangerous rumblings from Europe, the Greenwich Optimism Index for mid-sized companies climbed into positive territory in July 2011 and continued moving in the same direction among small businesses.

“In terms of credit conditions and economic sentiment, the question now is whether any of this summer’s positive momentum can survive the current market volatility, and if the small and middle market growth engine will stall yet again,” said Greenwich Associates consultant Don Raftery.


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