Overview
Rates are higher for longer, inflation persists keeping capex values high, bank credit has tightened, and economic headwinds pressure middle market performance. If this cycle follows historic trends and what’s past turns out to be prologue, capex volumes are likely to fall. But this cycle is proving to be unlike most others.
Through the first half of 2024, Secured Research surveyed over 1,400 Middle Market CFOs and 900 Middle Market CEOs about their business outlook and capex intent for the second half of the year. The findings may surprise you.
Revenue
- 29% forecasted overall year-end revenue was on pace to grow by 20% or more.
- 6% forecasted a year-end revenue decrease of 10% or more.
- 53% report revenues are tracking within a +/- 5% range.
This represents a growth in optimism over 2023 with 34% more companies reporting positive revenue.
Earnings
- 21% forecasted overall year-end earnings were on pace to grow by 20% or more.
- 13% forecasted a year-end earnings decrease of 10% or more.
- 58% report earnings are tracking within a +/- 10% range.
This represents a growth in optimism over 2023 with 26% more companies reporting positive earnings.
Capex
- 19% forecasted overall H2/24 planned capex was up by 20% or more.
- 21% forecasted a capex decrease of 10% or more.
- 44% report capex is tracking within a +/- 5% range.
This is a mixed result. 42% more companies are reporting capex growth of 20% or more at the halfway point in 2024 than in 2023. However, 31% more companies are reporting an expected decrease in capex for the last six months of 2024 compared to the 2023 survey.
Borrowing Conditions
- 37% report tighter credit conditions among their primary revolver bank.
- Largest areas of contraction are covenants, advance rates/exposure, and collateral.
- Non-revolver term lending activity is down 52% among revolver bank relationships while overall term lending is up 4%.
In 2023, Middle Market companies saw little credit tightening with only 9% reporting tighter lending conditions with their revolver bank. As more revolvers reach term, banks proactively reprice debt, and new capital needs arise, there is an accelerating realization of bank tightening in the middle market. While term lending from revolver banks was down markedly in 2024, overall term lending activity was up. This reflects a shift of CFOs seeking capital outside the revolver relationship.
Borrowing Intent
- 26% report increased borrowing needs of 20% or more for H2/24.
- 11% report decreased borrowing intent for the same period.
- 63% are planning to increase borrowing for capex in the back half of 2024 with 21% of those companies planning to fund those needs outside their revolver bank relationship.
This is a significant growth over 2023, with 42% more companies reporting greater borrowing intent for the back half of 2024 compared to 2023. The number of companies planning to fund capex needs outside their revolver relationship is up 174% over the same survey data from 2023. Principal sources of this capital were manufacturer offerings, other banks, commercial finance companies, and private credit providers.
Conclusions
Revenue growth looks good. Profits are similarly strong. Nearly one in five CFOs are planning to increase capex spend by 20% or more. Cash positions are down, revolver relationships are delicate, and though term lending activity through revolver banks is down, overall lending activity remains solid as they seek capital at increasing levels outside the bank group. All this lines up well for a commercial equipment finance sector ready to act on the opportunity.