Reflection of the 2022 year and what to be expected for 2023 2023 LENDER SENTIMENT REPORT MARCH 2023 C R ETE CAP ITAL I N C .
LENDER SENTIMENT SNAPSHOT This year's Crete Capital Sentiment Survey shares trends and insights into the BC Commercial Lending market. What did the commercial banks experience in the 2022 fiscal year and what are the expectations for 2023. We touch on interest rate forecasts, appetite for lending and trends in the underwriting process for commercial credit in support of commercial real estate transactions and corporate growth. Crete Capital's survey aggregates anonymous feedback from over a dozen higher level banking Directors and senior management, who are responsible for deal teams and lenders in the field. These banking institutions include the Big 5 Canadian banks, credit unions and regional institutions that focus on the BC market. CRETE CAPITAL Crete Capital specializes in supporting commercial real estate transactions and corporate growth of private midmarket operating companies. Crete Capital's core values are to build long-term, meaningful relationship by delivering disproportionate value to investors and entrepreneurs via debt capital advisory and financing placement services. Crete Capital Inc. 2
Crete Capital Inc. 3 2 / 2023 SENTIMENT Where they've been, and where they're headed 3 / INTEREST RATES Updated sentiment from key lenders in BC 4 / COMMON TRENDS 5 / THE TEAM Who we are, and how to reach us 1 / 2022 RECAP REPORT BREAKDOWN Highlights from the year that was Crete Capital touches on the following sections in the 2023 Lender Sentiment Survey: Items to look out for in the coming year
SENTIMENT HIGHLIGHTS 73% 90% 92% INCREASED BUDGETS FOR 2023 BELIEVE RATES WILL COME DOWN IN 2024 LENDERS MET THEIR 2022 BUDGETS Crete Capital Inc. 4 100% EXPECT ENHANCED UNDERWRITING 2022 closed out as a robust year of lending in the BC market. Bankers in large, report to have increased funding targets for the 2023 year. Commercial banking targets include various metrics including new client count, total dollars funded, variety in types of credit products and overall profitability (interest rate spreads & product fees). Enhanced underwriting standards span from interest rate stress testing, cashflow coverage, industry analysis, forecast sensitivity or restrictions on certain credit conditions. These standards vary across lenders and are generally negotiable dependent on the current environment and specific company/asset being underwritten.
In 2022, most lenders either met or exceeded their budgeted lending targets. It was a busy year, with the majority of activity driven in the first two quarters. 2022 Crete Capital Inc. 5
CLOSE TO 75% OF LENDERS SURVEYED REPORTED HAVING INCREASED LENDING BUDGETS FOR THE 2023 YEAR. INSTITUTIONS ARE LOOKING TO PLACE MORE CAPITAL AND BANKING PRODUCTS THIS YEAR RELATIVE TO THE LAST. Push for Market Share Enhanced Underwriting Criteria Focus on Quality Credit 2023 FISCAL Despite efforts to increase market share, lenders are looking to build their portfolio of credit products against a higher quality underwriting criteria given rising interest rates and variables in the economic environment. This results in a higher level of competition for established companies with strong cashflow and reputable investment groups looking to secure desirable assets. In other words, a larger group of lenders pursuing a smaller group of potential borrowers. The common desire to support growing operating companies and their capital needs will result in a healthy debt capital markets in 2023. Crete Capital Inc. 6
Crete Capital Inc. 7 INTEREST RATES COMMON SENTIMENT: RATES TO STABLIZE IN 2023, REGRESSION IN 2024 In 2023 we enter an interest rate environment that we have not seen in decades With 90% of bankers surveyed expecting rates to hold and de-escalate in 2024, we expect the cost of capital to stabilize in the coming years. It is believed that inflation will progress towards the targeted 2% and the quantitative tightening will have served its purpose. More discussions around interest rate hedging such as interest rate swaps, debt laddering and fixed rate terms started in the second half of 2022 and will continue for the upcoming quarters of 2023. That being said, economists and public sentiment have been wrong in the past. Current rates are well below historical highs when compared to the late 1980s and 1990s. Crete Capital advises their clients to consider rate hedging strategies to gain certainty of costs and confidence when contemplating significant transactions. Historical Canadian Prime Interest Rates
Crete Capital Inc. 8 2023 COMMON TRENDS The above common trends point to a general focus for most lenders. This consensus is expected to generate a crowding of competition for similar assets and pool of operating businesses in the BC market. Through this period, Crete Capital expects growth opportunities for established companies to strengthen their market position and build assets during this time period. ASSET CLASSES.UNDERWRITING.GREEN Asset Classes Common desirable asset classes heading into the 2023 year continue to be defensible sectors with strong fundamental macroeconomics, namely industrial, multi-family and accretive M&A opportunities. Underwriting Underwriting standards will be slightly heightened as lenders look to stress test cash flow and the long-term stability of operations. The ability to defend against market changes and a strong track record will be macro table stakes, with attention to micro ratio analysis and prudent credit structures are to expected. Green Banks are increasingly cognizant of pursuing assets and businesses that focus on sustainable practices (CSR) and properties that are emissions neutral. This may mean more advantageous terms for financing or a higher appetite for lending against these assets. For operating businesses, a company that has a concerted focus in building a sustainable supply chain or product will garner the attention of lending institutions in 2023.
DEREK ALDERSEY Principal DMITRII KHRYCHEV Associate DUNCAN FINDLAY Associate Crete Capital Inc. 9 MEET THE TEAM The Crete Capital Team has over 35 years of experience in commercial lending, commercial mortgages and Corporate Finance. With over $1B in transaction experience, BC's best can rely on Crete Capital to structure optimal financing terms and conditions in support of corporate growth and commercial real estate assets. With Crete Capital, you can expect a bespoke, hands-on service that is focused on value delivery and quality advice. To learn more, contact the Crete Capital team or visit: @CreteCapital www.CreteCapital.com JOEY K TAI, CFA Principal
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