Supply Chain, COVID, Labor Shortages and More Continue to Challenge Accurate Forecasting

The “kick the can” flexibility that banks and alternative lenders have exhibited toward middle market company borrowers during the COVID-19 pandemic is poised to change in the first quarter 2022, according to a new Carl Marks Advisors survey of financial services executives and advisors. Respondents to the survey said lenders may soon begin to act on loans to businesses that are underperforming or at risk of default, and believe this process will be complicated by the persistent difficulties companies are facing in accurately forecasting their revenues. According to the survey results, revenue forecasting is likely to present a challenge well into 2022.

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Interestingly, while most respondents believe banks and other lenders will be less flexible with borrowers beginning early in 2022, they also believe these institutions could experience difficulties recovering capital. In fact, less than 13 percent of those surveyed said that prospects are favorable for lenders to recover their capital from middle market companies in the event of a default related to a pull back in the economy.

“Lenders have been more flexible than anyone expected over the past 18 months, in part because companies have been facing unprecedented challenges. However, our survey shows we are approaching a pivot point where bankers and lenders feel it’s time to begin addressing excess leverage levels and lenient loan terms with borrowers whose future prospects are unsteady or unpredictable,” said Brian Williams, a Partner at Carl Marks Advisors, a leading middle market investment banking firm. “Survey respondents also agree that this process will be significantly complicated, as many companies haven’t been able to reliably forecast their revenues due to the impact of COVID, supply chain issues, labor shortages and other hurdles. This will make lender negotiations more difficult and contentious.”

Key findings from the survey include:

• 75 percent of respondents believe lenders will stop “kicking the can” on loans to middle market companies by the first quarter of 2022.
• Only 38 percent of respondents believe revenue forecasting will “normalize” for these companies by that time.
• 84 percent of respondents are equally or more concerned about leverage levels and lenient loan terms as compared to the end of 2020.
• Just 12 percent of those surveyed said that prospects are favorable for lenders to recover their capital from middle market companies in the event of a default.
• 75 percent of respondents believe the current period of inflation, which contributes to price hikes for materials and commodities, will persist for six months or more.
• 41 percent of respondents do not believe supply chain challenges and shortages will be resolved for U.S. companies by the end of 2021.

Carl Marks Advisors conducted the online sentiment survey from June 30 – July 16, 2021. In total, 125 responses were collected from financial services executives, advisors, and investors located across the United States and in a variety of industry sectors.

About Carl Marks Advisors

Carl Marks Advisory Group LLC (Carl Marks Advisors) is a New York-based investment bank that provides financial and operational advisory services. Our integrated client service teams unite industry, operations, and transaction expertise to create effective solutions in complex situations. Securities are offered through Carl Marks Securities LLC, member FINRA and SIPC. Additional information about Carl Marks Advisory Group LLC and Carl Marks Securities LLC is available at www.carlmarksadvisors.com and www.carlmarkssecurities.com.

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