September 2012

GE CCO Discusses NCMM Survey Loan Issuance Off, Yet Still a Lot of Supply

GE Capital recently partnered with the Ohio State University Fisher College of Business to establish the National Center for the Middle Market, which produces a Middle Market Indicator Survey. ABF Journal spoke with GE Capital’s Robert McCarrick as he relayed the findings of the survey and explained that although there is increasing pessimism about the economy and loan issuance is off, there is still financing out there — a benefit to both lenders and borrowers.

Robert McCarrick has made his career at General Electric in leveraged lending and asset-based finance. “GE is a leader in the middle market in both of these areas, and it’s been a great organization to be a part of,” he says. “GE always challenges me; its leaders are creative; it likes to serve its clients, and it always looks to be a market leader.”

After graduating from the University of Connecticut, McCarrick joined GE as an analyst doing collateral audits in its investment analyst group. He soon moved into the company’s healthcare receivables group and then spent 17 years in healthcare financial services where he attained the position of senior managing director. In February 2012, he took on his current role as chief commercial officer of GE Capital’s corporate lending group. Working his way up the ladder has taken McCarrick from his native Connecticut to Atlanta, to Bethesda and now back home to Connecticut.

While GE Capital’s Corporate Finance lending business serves many sectors, it is organized around certain industry verticals: metals and mining, energy, retail, and food and beverage. GE Capital also has verticals specializing in financing for companies in media and telecom, healthcare, franchise, vehicle fleets and aviation, for example, but these verticals are managed as separate corporate entities. McCarrick focuses on lending to middle-market companies in Canada and the U.S. “Our goal is to use our expertise to differentiate us in the marketplace while adding value to our client companies,” he emphasizes.

A Borrower’s Game

In 2011, GE Capital partnered with the Ohio State University Fisher College of Business to establish the National Center for the Middle Market (NCMM), which produces a quarterly Middle Market Indicator survey. Defining the middle market as companies with annual revenues from $10 million to $1 billion, the study covers about 195,000 companies across the U.S. employing roughly 41 million people. These companies represent one-third of private sector GDP and span all industries. Respondents include 1,000 CEOs, CFOs and C-suite U.S. middle-market executives. The health of these businesses and their outlook on the economy serve as an indicator of the greater U.S. economy as a whole.

“When we look at the second-quarter 2012 study, along with data reported by Thomson Reuters, we see that the overall middle-market loan issuance is off about 25% this year,” states McCarrick. “Yet there still is a lot of supply for financing out there, primarily coming from the bank market. So, we have a supply and demand imbalance, which is not always great for lenders, but it is great for borrowers. Borrowers can typically get very low cost financing right now, with fairly aggressive terms. As a lender GE would love to see more activity, because that’s indicative of a healthier economy in our view, and a healthier economy would lead to increased loan volume, business growth and employment. But right now we aren’t seeing that. The good news is for the borrowers that are seeing an ample supply of financing.”

McCarrick attributes the decreased levels of middle-market loans to a peak in refinancing activity in the 2009-2010 timeframe. “Probably half of the activity was refinancing loans made when markets were not as frothy and rates were a lot higher. As the refinancing activity peaked in 2011, we entered into 2012 where overall loan activity is down. So far, on a year-to-date basis, there isn’t much merger and acquisition or growth-related financing in the asset-based lending market. The dollars are out there to borrow, but there just aren’t that many companies looking for financing.”

The second-quarter 2012 Middle Market Indicator survey suggests increasing pessimism about the overall health of the global and U.S. economy. Ninety percent of respondents said the biggest challenge for middle-market companies is the cost of healthcare. Other concerns include regulatory impacts outside their control and the general cost of doing business. While the ABL product tends to ride out changing economic cycles, McCarrick speculates that less overall activity in the general market could have its effects on the ABL marketplace for the second half of 2012 and the first quarter of 2013. “A chunk of this is driven by what’s going on in the economy and the outlook of CFOs and CEOs. In general they expect there to be slower revenue growth in 2013. As a result of this uncertainty, they tend to be hoarding cash and waiting to see if confidence levels will pick up along with potential changes in the economy.”

Employment growth for middle-market companies is expected to slow slightly. But growth expectations for middle-market companies are more optimistic than those for larger firms, and even though their growth is slowing, middle-market firms are generating employment at twice the rate of small and large firms. The Middle Market Indicator report credits structural and operational distinctions as significant factors in the ability of middle market companies to continue to grow and to outperform other segments. These include the fact that 86% of middle-market companies are privately owned, enabling company leaders to operate more autonomously and focus on the long term without the pressures of required quarterly earnings reports. The companies are less exposed to the global economy and tend to be more diversified geographically across the U.S., which can help them weather changes across regional economies. Yet they remain vulnerable to risks arising out of the uncertainties of government actions.

Now that the Supreme Court has validated President Obama’s Patient Protection and Affordable Care Act, business leaders are anticipating the potential for large increases in healthcare costs down the road. That increase will directly impact many middle market companies. “During an election year, there are concerns about whether we will have a pro-business environment with the next administration,” comments McGarrick. “Folks want clarity as to what and who the next administration is going to be and whether they can work with that administration to help foster economic growth. We also have an environment where commodity costs are increasing. This uncertainty about the future, accompanied by these particular headwinds, motivates businesses to sit on the sidelines, use their cash wisely, keep a nice war chest and wait until they see better movement within the economy and a more optimistic point of view — whether that comes from consumer spending, employment, housing or something else.”

Riding the Tide

The factors coming out of the Middle Market Indicator survey show a notable decline in confidence levels for the U.S. economy in Q1 and Q2 in manufacturing, healthcare and wholesale trade. “These are the more troubled sectors out there,” instructs McCarrick. “Construction is suffering from a decline in confidence, especially on a global scale, though in the last couple of months we have seen some positive news in the housing sector stateside. The more positive sectors are the verticals we are in: metals and mining, the energy space and food, beverage and agribusiness. We continue to see a lot of momentum there, continuing through the end of 2012 and into 2013.”

The banks are back, and that adds to the competition for loan volume. “Just like everyone else, GE is trying to put money to work profitably with good companies,” says McCarrick. “When you are in this environment of more financing supply than there is demand, you try to be as competitive as possible, within reason, to maintain your market position.”

GE verticals help the company differentiate by leveraging its industry domain expertise. McCarrick says it helps them be smarter. “We still want to put money to work and lend to good quality companies as we help them through their cycles. We aren’t the kind of lender that bails at the first sign of trouble and pulls away.”

When asked if the hard lessons from the downturn have forced lenders to be more disciplined or if they becoming increasingly more aggressive in their pricing, McCarrick responds, “It appears to be a more rational environment now. When you see people getting aggressive for clients, it is because those clients are in a good position in the market with a growing business. Pricing continues to compress, but that’s better for borrowers.”

Prior to the crisis, institutional money in the form of CLO and prime rate funds represented about 70% of the market, but McCarrick says that number has whittled down to 30% to 40%. “The current market is more dominated by bank lenders, so we have a change in the investor base — this has led to favorable pricing and appropriately aggressive structures for a lot of borrowers. In this more traditional bank market, the ABL world operates within a more standard ABL-type formula in terms of advance rates and things of that nature. When you look at the leveraged lending world, loans are structured with more reasonable leverages and more amortization. The markets are aggressive enough right now for borrowers to get advantageous financing with decent flexibility to help foster growth within their businesses. The bigger question is about the economy, the outlook and the uncertainty out there, and whether companies are willing to engage in new financing and corporate acquisitions to foster growth.”

McCarrick claims the business leadership at GE Capital is keen on managing through the economic cycles. “If one business is cycling, there’s often opportunity in another. Our approach is less about one industry cycling over another; it’s more a philosophy of how we play across the board. The economic downturn was the biggest economic event since the Great Depression, and we hope it was the 100-year storm. If you’ve gone through it, you’ve learned from the experience, and you’re going to be better off as a result.”

The GE Capital Approach

When GE Capital enters into a loan with a company, it does not look at the deal on a purely transactional basis. “We look at the business to foster a relationship and support them, so we can grow with that business over time,” explains McCarrick. “During the downturn, we did extraordinarily well in terms of sticking with our portfolio. We played through with all our borrowers across the board, and a lot of them are doing better now than they were pre-crisis.”

One of the ways GE adds value to its clients is through Access GE, a consultative service that shares the GE toolkit that the company developed over its 100-plus year history. “As a financing company and a leading industrial business, we are uniquely positioned to share our knowledge to help our customers and prospects grow. We can assess needs, offer input from industry leaders within GE and provide tools to help our customers solve their own business problems. This is tremendously impactful,” stresses McCarrick.

The ABL market has always been a core competency at GE Capital, and the company prides itself on being an industrial business as well as being able to understand business cycles. “We look to play in every market,” says McCarrick. “Whether frothy, stagnant or a downturn, we feel we have the capabilities, products and balance sheet to compete. Beyond that, we like to supplement with industry and product domain expertise, in the form of verticals or Access GE. Our goal is to support our borrowers, clients and customers. If it is a frothy market with high economic activity and a lot of growth, we look to put capital to work and increase our market share in support of our borrowers and clients. If it’s a more troubled market, such as the stagnant market we have now, we are still going to put as much money to work as we possibly can, to support companies and fuel growth.”

Whether the market is up or down, McCarrick is in it for the long haul. “I love the excitement of the deal process, developing relationships with leading middle-market companies and learning about different types of business models and industry sectors. I also get a great deal of satisfaction working with companies to help find solutions to challenges they are facing as well as helping them finance their growth and achieve their goals. GE Capital is a business that plays through all the cycles, and that’s why we say we are more than bankers, we are builders.”

Lisa A. Miller is a freelance writer who has worked in the equipment financing industry for 15 years.