Once Forbidden, Optimism Returns to the Middle-Market’s Growth-Minded Business Leaders

As 2013’s first calendar quarter unwinds, middle-market business leaders have begun to echo a bold new sentiment — or at least one seldom heard in recent years. Middle-market watcher Bill Fink, EVP and chief lending officer at TD Bank, doesn’t hesitate to use the word “optimism” when characterizing the new business sentiment. Armed with the findings from a recent TD Bank survey, Fink answered a few of our questions regarding the changing business sentiment inside the lower middle market.

MME: Where exactly do we see traces of this new optimism beginning to surface in the middle market?

Fink: Well, one of the things we see is that there’s an acceleration of the view that the economy is getting better. Finance managers have gotten clearer about world events, or they believe things are not going to get worse, and are moving forward in a positive sense. The Euro crisis, while not yet resolved, has somewhat stabilized. The sequestration issue (budget cuts involving the government) is understood, albeit with no clear resolution in the short term, but the tax deal that was advanced right after the election has allowed managers to feel good about the general direction of things, and this has caused middle-market businesses to finally break with past uncertainty, In certain segments — for example, in the area of capital equipment — we’re seeing an increase in requests. Whether it is for leasing programs or outright purchases, in many respects it’s for more efficient capital equipment, or an order to replace capital equipment that they have held on to from before 2008 to the present time. Now, having said that, we haven’t seen with any consistency capital equipment being financed for aggressive expansion.

MME: How does this translate into more sales for middle-market businesses?

Fink: What we’ve seen is that sales are rebounding to pre-recession levels in a lot of our industry segments. So we have begun to see requests for expansion of working capital facilities, either outright accounts receivable or in some cases account receivables and inventory. Now, that has been a long time coming, but there’s clearly some momentum. As I go across our markets, what I do see is a change in sentiment from 2012 to the present. It was clear to me in August of last year that things were slowing down, and that had a lot to do with all the uncertainty that businesses were experiencing. Now what we see are businesses saying, If we can determine where the government is and where it should come out, there is a very strong sense of optimism about the second half of the year into 2014. And a lot of it has to do with the relative cost of money being cheap. So if people can get their arms around what the business environment is going to be, they have opportunities to grow because the cost of money is not an issue.

MME: It’s been cheap for years. What was holding them back?

Fink: I think that as we came out of the recession, there was a classic approach of expense management, and they cut and slashed and deferred capital expenditures and improvement programs, and took an expense management approach because they couldn’t determine when and how to grow revenue on a continuing basis. And it’s that cycle — to my way of thinking — that has now been exhausted inside most businesses. So now they’re investing, and it may be in direct marketing programs, the development of new products, or the extension of a life cycle for existing product, but businesses are now devoting more attention to revenue growth and revenue enhancement rather than increasing profitability through further expense management. This is something that we see very consistently.

MME: What does this new sentiment mean for hiring?

Fink: Well, I would plan to be cautiously optimistic. What we see is strategic hiring, but we don’t see wholesale hiring, and I think that when it comes to hiring, there is still some apprehension about the costs of Obamacare. The other thing is that companies have learned how painful it is to lay off people, so they when they do hire, they want to be certain that it’s a sustainable hire. However, having said that, now we are hearing a greater willingness to hire and expand.

MME: What does this mean for the working capital habits of middle-market companies?

Fink: The uncertainty that enveloped the world for the last 4 years caused companies to horde cash as a protection, and we have seen our customers not borrow with anywhere near the frequency they once did. We have certainly seen this in utilization rates for credit facilities. In years past, before the recession, you would see industry averages for the banking industry where utilization rates on committed lines of credit would exceed 50 percent, whereas for the last several years, they have been hovering in the low 40s. We are now seeing something of an uptick, where utilization runs from the low to mid-40s, which to me is a very positive indicator that people are in fact having a greater working capital demand, which should translate to increased sales. We’re at the early stages of what I hope will be a sustained recovery for the utilization of credit facilities. To me, this is a key indicator that a recovery is taking hold.

So this is really step one, where step two is when we see cash being utilized and we’ll likely begin to see some M&A activity. This doesn’t necessarily mean companies buying companies. What I think we’ll see are businesses interested in buying either a line of business or a division, and we’ve been seeing this already among businesses over $100 million in annual revenues.