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30% of Mid-Market Lenders dropped rates to compete for borrowers in 1Q21

·5 min read

Cerebro Capital reports shifts in middle-market lending as the U.S. economy continues to reopen

BALTIMORE, May 6, 2021 /PRNewswire/ -- Cerebro Capital, a commercial loan platform, today released its Q1 2021 survey on non-bank lending for middle-market commercial and industrial (C&I) loans. The results are paired with the Federal Reserve's 1Q21 survey of commercial banks to illustrate a comprehensive perspective of corporate lending to middle-market borrowers and how it compares to the previous quarter.

Cerebro Capital (PRNewsfoto/Cerebro Capital)
Cerebro Capital (PRNewsfoto/Cerebro Capital)

Cerebro Capital reports shifts in middle-market lending as the U.S. economy continues to reopen

Cerebro's quarterly non-bank lending survey was initially launched in the second half of 2020 to provide deeper insights into the $3T credit market and commercial banks compared to non-bank lenders in 1Q21. The 1Q21 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.

Both commercial bankers and non-bank lenders saw increased demand for C&I loans from their lending institutions in Q1 2021. 33% of commercial bank lenders saw an increase in loan inquiries from potential borrowers. Over 60% of non-bank lenders, which include private credit funds, mezzanine funds, and business development companies have expressed strengthened demand in the past quarter.

Cerebro also found:

Increasing Borrower Demand Driven by Shift to New Lenders

  • Borrowers are switching lenders: 80% of non-bank lenders indicated that borrowers requested loans from them because they offered better terms than competitors. The majority of Commercial Banks (64%) reported that switching lenders was not a factor for their borrower demand increases. One possible reason for this trend is the increase in commercial bank borrowers choosing to include non-bank lenders in their credit search processes. Non-bank lenders have been offering loan terms that, though a bit more expensive, offer larger loan sizes and more flexible terms.

  • Increased Accounts Receivable, Inventory, and Plant Expansion: About 75% of non-bank lenders reported increases in A/R and inventory working capital needs as a sharp driver of new loan demand. However, the majority of commercial banks, nearly 85%, saw the majority of new loan demand come from investment in property, plant and equipment. This is not surprising considering the economic impact of reopening from the pandemic.

  • High M&A Activity: 56% of commercial banks and 73% of non-bank lenders reported M&A as a key driver to new loan demand in 1Q21. However, of all the reasons driving demand for non-bank lenders, M&A activity had the largest number of lenders (48%) indicate that it is a "very important" factor. This trend continues on from 4Q20 during which M&A activity started to pick-up.

Lenders Compete by Improving Non-Bank and Traditional Loan Terms

  • Larger Loan Sizes: 34% of non-bank lenders have increased loan sizes over the past quarter compared to only 22% of commercial banks. Non-bank lenders have been more aggressive on increasing loan sizes for their clients as the economy improves and competition heats up.

  • Lower Interest Rates: Approximately one-third of both commercial bank and non-bank lenders have indicated that they have lower interest rates over the past quarter for new loans. In general the credit markets have begun to relax as risk of lending has decreased in the anticipation of the economy reopening.

  • More Flexible Loan Covenants: Nearly 20% of both commercial bank and non-bank lenders have eased loan covenants and structuring. Though some lenders are providing more flexible structures than typical to win market share, other lenders are offering structures that resemble pre-covid lending structures, representing a relaxed approach compared to the past six months.

Optimistic Outlook for Easing Loan Terms in 2021

Looking ahead for the remainder of 2021, nearly 40% of non-bank lenders surveyed anticipate continuing to ease loan terms. The primary reason for this outlook is that 60% of these lenders expect increased competition for high quality corporate borrowers, requiring more aggressive actions to win new business.

"We've been excited to see lenders offering much more competitive terms, such as 3 years interest only financing, covenant lite structures, and lenders getting comfortable with cash equity at 10%, which is 50% lower than what lenders required the second half of last year," said Matt Bjonerud, CEO of Cerebro. "We believe this uptick in activity is pent up demand from the prior year and do not see activity slowing down in the foreseeable future, but it's unclear how long lenders will offer aggressive terms to deploy their excess cash."

Additional Highlights
The survey information from both Cerebro and the Federal Reserve point to several other shifts in lending trends. Download the raw data and survey report to see more detail about the following trends and insights:

  • Lender outlook on delinquencies and charge-offs

  • Expectations for future demand for new loans

  • 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/.


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SOURCE Cerebro Capital