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Cerebro Capital Releases its Q2 2021 Survey on Middle-Market Lending Benefits Commercial Borrowers

Banking CIO Outlook | Monday, October 04, 2021

Cerebro launched its survey in the second half of 2020, marking this as the fourth consecutive survey providing insights into the $3T credit market from alternative lenders that compete with commercial banks for business.

Fremont, CA: Cerebro Capital, a commercial loan platform, released its Q2 2021 survey on non-bank lending for middle-market commercial and industrial (C&I) loans. According to the survey, lenders saw increased demand for credit because of the booming M & M&A market and the improving economy. At the same time, underwriting standards and loan terms continue to ease because of increasing competition among lenders. 

Cerebro's analysis of the middle-market commercial and industrial loan market includes its quarterly survey and the Federal Reserve's quarterly survey of commercial banks. In doing so, Cerebro provides a comprehensive picture of corporate lending to middle-market borrowers, as well as an outlook for the next six months.

Participants include Managing Directors and Vice Presidents who manage lending in the private credit and mezzanine funds and business development spaces. These lenders work with middle-market borrowers and offer loan sizes between $2 million and $100 million.

Lending Demands Ease for Larger Loans

Cerebro's survey reports credit standards have become more borrower-friendly as 36 percent of lenders reported easing standards over the last three months. With a jump from 1Q21, which reported 28 percent of easing credit, the market continues to trend upward as lenders expect their capital positions to improve.

The market also showcases signs of sharp economic improvement as COVID-19 vaccines have been distributed and have resulted in sharp declines in deaths since the beginning of 2021. Additionally, nearly 60 percent of lenders indicated that increased competition from other lenders was a significant factor in easing standards over the last three months.

Commercial Loan Inquiries on the Rise

Nearly 70 percent of lenders stated increased demand for credit in comparison to the prior quarter. Responses from lenders with increased demand indicate that the top two reasons for new loan questions were due to M&A (91 percent said this was an important factor) or because other sources of capital were less attractive.

In 1Q21, 27 percent of non-bank lenders indicated that M&A activity was not an important driver in demand for them; however, in 2Q21, that number dropped to 9 percent. Borrowers searching for better terms on their capital continued to be a strong driver quarter over quarter, with 70 percent of lenders indicating this a significant reason why they saw more deal flow. 

Borrowers Outlook Trends Positive

Twenty-eight percent of lenders expect that larger loans will become even easier to get in the next six months, and they also expect rates and terms will continue to get better for borrowers in the face of competition from other lenders. Ninety-four percent of lenders surveyed who are expecting to ease standards anticipate doing so in response to increased lender competition, which is a 10 percent increase compared to the prior quarter. The expected improvement in a lender's loan portfolio, as well as increased risk tolerance, was the following highest reason driving the ability to ease credit standards with 65 percent and over 80 percent of lender response, respectively.

"We continue to see loan terms improve as demand and competition from other lenders increases. To win more loans, lenders made concessions on loan terms because of reduced borrower industry risk, improved liquidity position, and increased tolerance for risk," said Matthew Bjonerud, CEO of Cerebro Capital. "Hungry lenders coupled with eager borrowers makes for a prime market that will continue into Q3."

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