March 2011

After an Inconsistent Start, ABLs See Dramatic Jump in Q4 Pipeline … Aggressive Behavior Ahead

Lenders concede that in 2010, not only was liquidity resoundingly back, making everyone itchy to put money to work, but more noteworthy, lenders could look back over the last two years and confirm that their portfolios had made it through the credit crisis relatively unscathed. In turn, deal structures became more aggressive as lenders sought to grow their books.



Asset-based lenders were busy in 2010. Perhaps not consistently busy throughout the year, and arguably not as busy as some would have liked, but at over $61 billion, 2010 asset-based lending (ABL) represented a 44% increase year over year (See Figure 1).

More significantly, at just under $18 billion Q4/10 volume represented the highest quarterly issuance figure since Q4/07 ($20 billion) when the loan and broader credit markets were humming along ahead of the financial crisis that was to hit a year later.

Lenders concede that in 2010, not only was liquidity resoundingly back, making everyone itchy to put money to work, but more noteworthy, lenders could look back over the last two years and confirm that their portfolios had made it through the credit crisis relatively unscathed. In turn, deal structures became more aggressive as lenders sought to grow their books.

The deal pickings were limited however. At $16 billion, total new ABL issuance represented roughly 26% of total ABL activity. (See Figure 2) “Volume [was] ok,” noted one lender at the beginning of the year. “But not nearly enough to make people happy. There is a lot of [deal] churn.”

As regional and foreign banks slowly weighed back into leveraged lending and the universe of lenders widened, grumblings around commitments being scaled back in final deal allocations became a recurring theme. So, too, was the matter of top heavy or clubbed deals that bypassed the need for broad retail syndication.

At the beginning of the year, several lenders pointed out that even if they were ahead of where they were in 2009 in terms of lending activity, it was over twice as many deals — many of them smaller credits of less than $100 million. (See Figure 3) Even among larger deals, lenders were cut back as in the case of Dole Foods, which extended its $350 million ABL revolver in February, and TPC Group, which upsized its ABL revolver and still cut back lender commitments.

Not only did the market become more aggressive, it did so at a quick clip. At the end of Q1/10, as the market wrapped an exit financing for Lyondell, the deal emerged as a bellwether for the ABL market as arrangers pushed through the $1.75 billion, raising $500 million in retail syndication. However, by the end of Q4/10, lenders were chomping at the bit in anticipation of what are expected to be substantially large, event driven financings for Jo-Ann Stores, J. Crew and DelMonte (only the latter represents a new issuer in the ABL space).

Ultimately, 65% of total 2010 issuance represented corporate (i.e., non-event driven) transactions and these were dominated by refinancings (See Figure 4). In fact, lenders made significant headway chipping away at the near term refinancing cliff throughout the year. Drilling into the maturity figures, at the end of 2009, roughly $136 billion of existing ABL credits were slated to come due between 2010 and 2012. At the end of 2010 this figure was reduced to $80 billion (See Figure 5).

An incremental 14% represented amend and activity, while a comparatively thin 7% of total issuance (up from 5% in 2009) represented new ABL assets in the form of M&A. In a testament to improved corporate credit profiles, DIPs and exit financings, which made up a meaningful 15% of total 2009 ABL volume, retreated in 2010 to make up 9% of total issuance.

Yet most 2010 ABL lending activity came down to two recurring themes: Lender efforts to grow their books and the inadequate supply of outstandings under existing credits. Competition for scarce assets intensified with lenders pointing out that not only were “ABL guys beating each other up, ABL guys were beating up middle-market cash-flow guys.” Moreover, noted one lender, “We are pitching along side our middle-market cash-flow guys and the cash-flow option looks very similar to ABL. Middle-market cash-flow deals may have a borrowing base and pricing inside where ABL is, and you look at yourself and say, ‘Isn’t this what got us into trouble?’ But we are at the bottom of a cycle.”

In the large corporate space, the battle for assets played out in an intensified scramble among arrangers to snatch lead roles and existing relationships from one another amid a bevy of ever-thinning spreads and looser structures. Issuers including Basspro, Big 5 Corp. and Amscan all locked in financings via new lead arrangers.

Competition was heightened not only by the emergence of a new tier of ABL lenders such as U.S. Bank, RBC, Regions Bank, TD, Sovereign Bank, SunTrust and Citizens, all of which looked to re-establish or grow their ABL footprint, but also by a resurgent lending climate which has traditionally favoured investment banks.

Indeed, the pairing up of an asset-based loan with a high-yield bond or substantial term loan — which was far more appetizing in 2010 than it was a year earlier — is less a matter of ABL, according to one arranger, and more a matter of who is best able to bridge that last dollar to get a large deal done. This becomes even more important in the context of any discussion of M&A financings.

Larger deals often required support from other capital markets offerings, but if there was a good story to tell, deals got done. In Q2/10, for example, ABC Supply raised over $1 billion and the arrangers did not go out broadly to the retail market. But there was a positive story that came with the deal — it was an existing credit that was being upsized, with a solid pool of current assets and a positive cash flow. More significantly, for lenders, there was 40% usage under the line. The final deal closed at over $600 million.

“We have no worries around selling a deal,” noted one lender. “We need [more] deals in the hopper.”

Of course, the enthusiasm was tempered by a note of caution by year end. “It’s amazing how quickly people are getting amnesia,” said one arranger.

At the outset, spreads began the year in the mid- to low 300bp range tumbled quickly to LIBOR+250 or even LIBOR+225 by year end (See Figure 6)

And, of course, smaller, relationship credits had even more aggressive pricing. Lenders concede that part of this drop is rooted in the increased competition, but part of it is rooted in the fact that the market as a whole is feeling good about the fact that it has largely weathered the credit storm.

“I wish the market would not come back so far so fast, but it will,” said one arranger. “In 2011, it will get [more] aggressive real fast and by mid-year we will all be uncomfortable with how aggressive it is, but you don’t want to fall behind either. And [in the final analysis] if the market takes a breather, ABL will also take a breather.”