Cerebro's quarterly non-bank lending survey was initially launched in the second half of 2020 to provide deeper insights into the $1T private credit market. The Q4 survey was completed by Vice Presidents and Managing Directors of alternative lenders that target middle-market borrowers and offer loan sizes of between $2 million and $100 million.
With over 70% of non-banks surveyed by Cerebro seeing increased demand for C&I loans from their lending institutions in Q4 2020, non-bank lenders, which includes mezzanine funds, business development companies, and venture debt lenders, are a critical part of the middle-market financing landscape.
Credit Markets Improve for Mid-Market Corporate Borrowers in Q4 Both commercial bank and non-bank lenders saw credit standards ease up in 4Q20 compared to the prior quarter. Twenty percent of non-bank lender respondents indicated terms eased compared to only 6% in the prior quarter. Twelve percent of commercial banks responded that terms were easing compared to only 3% in the prior quarter.
"Borrowers seeking new loans in 4Q20 have the benefit of two quarters of history through the pandemic, which allowed them to generate more accurate forecasts for 2021," said Allan Smallwood, Senior Director of Capital Markets for Cerebro Capital. "Additionally, the FDA approval of vaccines in Q4 helped lenders have more confidence in improving economic conditions."
Non-Bank Lending Institutions See Demand Increase More in Q4 than Commercial Banks Over 70% of non-banks surveyed by Cerebro saw demand for C&I loans from their lending institutions increase in Q4 2020. During the same period, only 26% of bank lenders saw C&I loan demand increase. Eighty percent of non-bank lenders indicated that the increased demand to their institutions was from borrowers looking to leave their incumbent lenders. Cerebro's loan data indicates that non-bank lenders attracted new borrowers with more flexible covenant packages and loan structures compared to their commercial bank counterparts.
M&A Activity Drives Demand for New Financing Seventy-nine percent of commercial banks participating in the Federal Reserve's survey and 72% of non-bank lenders participating in Cerebro's survey indicated that M&A activity drove demand in 4Q20. "The pandemic has created remarkable M&A opportunities for those who have access to capital for acquisitions," said Matt Bjonerud, founder and CEO of Cerebro Capital. "Tremendous buying opportunities are coming from companies offering themselves for sale at a discount due to temporary impacts to revenue and cash flows. Creditworthy companies are taking advantage of the opportunity to buy competitors at a temporary discount."
Lenders Show Signs of Optimism in 2021 Outlook Heading into 2021, 45% of the non-bank lenders included in the survey expect lending standards to ease over the course of the year. In contrast, commercial banks were more measured in their outlook with 80% of respondents expecting lending standards to remain the same. Commercial banks have a regulatory burden that makes it difficult for them to lower their underwriting standards and they lean heavily on historical financial information to complete their underwriting, which is broadly limiting their ability to underwrite new borrowers.
At the same time, lenders expect a significant increase in competition, with 75% of non-banks responding that competition will be an important driver of improved loan terms for borrowers in the coming year. "Government stimulus led to significant growth in deposits at the large commercial bank in Q4 while, owing to weak economic activity, their loan issuance decreased. Concurrently, low interest rates fueled rapid growth in AUM at private debt funds. Competition in the corporate lending markets is therefore likely to strengthen over the coming year, as banks rebalance their loan books and debt funds deploy their 'dry powder,'" said Ken Singleton, the Adams Distinguished Professor of Management, Emeritus at Stanford University.
Other Key Highlights The survey information from both Cerebro and the Federal Reserve point to several other shifts in lending trends. Download the survey report to see more detail about the following trends and insights:
Lenders willingness to increase their risk tolerance
Demand for new loans
Competitive impact on loan terms
Borrower demand for precautionary cash
Cerebro's 800+ lender network is split evenly between commercial banks and non-bank lending institutions. With such a broad lender network, Cerebro offers middle-market companies a data-driven approach to navigating hundreds of commercial bank and non-bank lenders.
About Cerebro Capital: Powered by over 800 commercial bank and non-bank lending institutions, Cerebro Capital ("Cerebro") is a data-driven platform purposefully designed to democratize access to credit markets by connecting corporate borrowers and lenders to find and close corporate loans ranging from $2 million to $100 million. Working with finance and technology experts, Cerebro has created a holistic corporate loan management solution designed to revolutionize the way borrowers, lenders, intermediaries and stakeholders manage corporate debt. To learn more about Cerebro, please visit, https://www.cerebrocapital.com/.