Middle market shaken, but not broken, by COVID-19
Each quarter, to understand what impact current macroeconomic conditions and government policies have on the business environment, KeyBank surveys 400 middle market business owners and executives – defined as those in the $10 million to $2 billion range.1
U.S. business community is laser-focused
Months after the coronavirus national emergency2 began, the U.S. business community is laser-focused on a shared goal: how to safely rebound from the COVID-19 pandemic and its related shutdown. While the level of optimism is generally trending upward, the pandemic is not yet over, and business owners are wary about the nation’s economic health.
As companies see the impact of the federal recovery dollars, their own cost-cutting measures and operational adjustments, they’ve become slightly more optimistic than they were in late March when last surveyed. Some have begun measured re-opening, fueling more optimism. However, as many areas of the country see a new spike or resurgence in COVID-19 cases,3 the need to remain vigilant in health and safety practices and to be flexible in operations continue to be important as businesses shape a sustainable long-term recovery.
“The news is mixed. While business leaders are concerned about the future impact of recent infection spikes, second quarter numbers have been, in many cases, better than the dire projections that many of our customers made.”
– Timothy Burke, President, Northeast Ohio, KeyBank
Executive outlooks show a lift since the start of the pandemic
Overall, responses to the June survey suggest that the impact of COVID on middle market businesses has not gotten worse since the second quarter. Compared to late March, when shutdowns to combat the spread of COVID-19 took hold, outlooks have begun to shift back toward being slightly more positive, particularly at the state and national levels, where they were lowest. When asked about their business health, a slight majority (51%) of business owners stated they were very positive or somewhat positive about their performance; additionally, those who reported a negative perception of their business health improved from 37% to 26%.
Overall Outlook for the Next Twelve Months Compared to Late March Survey
Company
30% - Excellent
24% - Very Good
22% - Good
17% - Fair
7% - Poor
State Economy
22% - Excellent
18% - Very Good
25% - Good
22% - Fair
13% - Poor
U.S. Economy
21% - Excellent
18% - Very Good
20% - Good
24% - Fair
17% - Poor
COVID-19 Business Health
Q2 2020 Late March Survey
21% - Very Positive
26% - Somewhat Positive
15% - Neutral
28% - Somewhat Negative
10% - Very Negative
Q3 2020 Late June Survey
26% - Very Positive
25% - Somewhat Positive
23% - Neutral
18% - Somewhat Negative
8% - Very Negative
There is something to be said for having expected a dark economic scenario; there’s room to be pleasantly surprised. A strong majority of respondents, 70% total, told KeyBank that the impact on their business so far hasn’t been as bad as they expected. These respondents reported that their business health has been either as expected or better than the original projections made when they were first faced with the economic reality of COVID-19 in March.
Changing How the Middle Market Works
The nation’s approach to reopening after shutdowns has been regional or state-driven,4 and most middle market businesses had to make changes to comply with regulations designed to keep their employees and communities healthy. A resounding majority of middle market businesses (76%) reported changing their operations somewhat or very much in response to COVID-19, with their top actions including implementation of enhanced safety measures, transition to a remote workforce, reducing employment headcount or compensation, and applying for loans or lines of credit.
Actions Taken to Mitigate the Impact of COVID-19
Q3 2020
75% - Taking additional safety measures such as enforcing social distancing and/or wearing facial mask, changing operating hours/staggering or adding shifts, temporarily closing storefronts/offices and employees working remotely/working from home
57% - Reducing staff
51% - Seeking loans and/or lines of credit or developing a contingency plan for the business
27% - Reducing compensation and/or benefits
27% - Transferring money out of investments or savings accounts
25% - Reduced payment by negotiating temporary monthly expense reductions/suspension of payments or loan/relief modifications on any of your company’s existing credit facilities
23% - Accepting different payment types such as Accepting card payments more often, accepting cash payments more often, using business credit card(s) for payment more or reaching out to my business banking institution for help/solution
Actions Taken to Mitigate the Impact of COVID-19
Q3 2020
75% - Taking additional safety measures such as enforcing social distancing and/or wearing facial mask, changing operating hours/staggering or adding shifts, temporarily closing storefronts/offices and employees working remotely/working from home
57% - Reducing staff
51% - Seeking loans and/or lines of credit or developing a contingency plan for the business
27% - Reducing compensation and/or benefits
27% - Transferring money out of investments or savings accounts
25% - Reduced payment by negotiating temporary monthly expense reductions/suspension of payments or loan/relief modifications on any of your company’s existing credit facilities
23% - Accepting different payment types such as Accepting card payments more often, accepting cash payments more often, using business credit card(s) for payment more or reaching out to my business banking institution for help/solution
The reopening so far has been measured and has had some disruptions since the virus spread is not yet under control. Planning and management have been clearly challenging for business owners.5
However, half of middle market businesses who have made changes to their business operations as a result of COVID-19 are somewhat or fully operating again.
Even so, most owners and executives are not staffing their businesses at pre-pandemic levels. Of the middle market businesses that reduced their staffing in response to COVID-19, many companies are not likely to bring back all employees. However, bringing back employees who were furloughed is generally more likely than bringing back those who were laid off.
“The majority of customers we’ve talked to believe that the Paycheck Protection Program was effective and helped to save many jobs at each of their companies. Many would have laid off employees had it not been for that program,” said Burke.
Future Plans Around Hiring and Staffing
Furloughed
37% - Bring back some employees who were previously furloughed
30% - Bring back most employees who were previously furloughed
16% - Bring back all employees who were previously furloughed
Compensation and/or Benefits
22% - Reinstate some of the previous employee compensation and/or benefits reductions
16% - Reinstate most of the previous employee compensation and/or benefits reductions
23% - Reinstate all of the previous employee compensation and/or benefits reductions
Laid Off
27% - Rehire some employees who were previously laid off
17% - Rehire most employees who were previously laid off
9% - Rehire all employees who were previously laid off
Other
15% - Hire new employees
6% - Planning for additional employee compensation and/or benefits reductions
12% - No plan for increasing current levels of employee compensation and/or benefits
COVID-19’s impact on middle market M&A
The pandemic has also made the merger and acquisitions forecast murkier for middle market executives. Past consideration of acquisitions and future likelihood of completing one have remained consistent since December. However, most middle market businesses report that lower company valuations due to COVID-19 are making an impact on their likelihood to complete an acquisition.
Past and Future Acquisition Considerations
Considered Acquisition for the Past 6 Months
Q2 2020
38% - Yes, completed one
17% - No, but strongly considered
10% - No, but somewhat considered
35% - No, and did not consider
Q3 2020
35% - Yes, completed one
20% - No, but strongly considered
12% - No, but somewhat considered
33% - No, and did not consider
Likelihood to Complete an Acquisition in the Next 6 Months:
Q2 2020
30% - Extremely Likely
16% - Very Likely
15% - Somewhat Likely
18% - Very Unlikely
21% - Extremely Unlikely
Q3 2020
27% - Extremely Likely
17% - Very Likely
15% - Somewhat Likely
19% - Very Unlikely
22% - Extremely Unlikely
Middle market still wary about national economy
Unsurprisingly, concerns with COVID-19 have significantly increased since early March and are the primary reason for a dim outlook with respect to the U.S. economy. Of those who have a good, fair or poor outlook about the national economy, coronavirus concerns are intertwined with worries about a potential economic recession (67%) and the volatile political landscape (56%). Increasing tariffs have tumbled down the list of worries for business owners.
Factors Causing Low Outlook for U.S. Economy Q3 2020
90% - COVID-19/Coronavirus
67% - Potential Economic Recession
56% - Volatile Political Landscape
33% - Higher Healthcare Costs
33% - Potential Changes in Trade Agreements
20% - Increasing Tariffs
20% - Increasing Global Competition
19% - Higher Labor Costs
11% - Higher Energy Costs/Carbon Tax
8% - Currency Wars
3% - Other
The U.S. economy has reached a crucial point at the beginning of the third quarter, the Wall Street Journal says, pointing to a stronger end to the second quarter with rising retail sales causing a bounce in gross domestic product: “But what really matters for investors and Americans generally is if the economy is in substantially better shape in September than it was in June, with more sales, more production, and more people working.”6 Yet, the recent resurgence of COVID-19 threatens that recovery. After showing improvement in key indicators such as employment, consumer spending and stock performance over May and June, the economy more recently has started to be roiled by the country’s inability to quash the virus’s spread.7
Middle Market Sees Some Bright Spots in Dark Days
Middle market businesses are slowly restoring more normalized operating and financial positions after taking steps to help their companies withstand the initial brunt of the COVID-19 pandemic. However, it’s clear that their worries are far from over. For the remainder of 2020, economic recovery will be tied to public health and require continued cooperation from the private sector and state and federal government.
KeyBank is committed to providing real-time support and market insight as businesses respond to the COVID-19 crisis. Our Relationship Managers can bring your company strategic advice and value-driven solutions to help navigate the shifting economic environment.
We’re here for you.
For more information on KeyBank’s middle market capabilities, contact a KeyBank Relationship Manager.