The ‘Other End’ of the Market: Increased Competition Indicates a Fertile Playing Field
In this year’s ABL Marketplace issue, ABF Journal gives equal voice to the “other end” of the market — namely to the deals $20 million and under. As such, we invited Bridge Bank’s Darla Auchinachie, Marquette Business Credit’s Guy Camerlengo, MidCap Business Credit’s Seth Cooper and AloStar Business Credit’s S. Scott Simmons to provide an outlook on what turns out to be a fertile playing field.
It appears there is no lack of availability for working capital loans in the smaller asset-based lending market. Seasoned ABL lenders are going head to head in an environment that is increasingly penetrated by banks and other new entrants. “We are all trying to capture market share in the commercial finance world of companies with revenues of $10 million to $100 million,” admits Guy Camerlengo, senior vice president at Marquette Business Credit, Inc. “The smaller regional banks are aggressively trying to break into this space as a way to diversify their loan assets away from real estate and into C&I.”
Complicating the picture, new independent finance companies are popping up, and regional bank ABLs are expanding geographically to capture market share. S. Scott Simmons, director at AloStar Business Credit, agrees. “I’m out there every day fighting the battles, and there is no shortage of competition. There are plenty of lenders focused on our market as well as new entrants.” He should know, because AloStar is one of those new entrants. Established just over a year ago, this new lending group comprises experienced asset-based lenders, each averaging about 25 years in the business. “We are not the only new entrants, either,” emphasizes Simmons. “That tells you there is smart money looking at the companies in our target revenue range, and they see opportunity.”
“The market is very competitive, and there are regularly three or four lenders bidding on a single transaction,” says Seth Cooper, senior vice president at MidCap Business Credit, LLC. “There’s plenty of supply, but I wish there were more demand.” MidCap differentiates itself from the competition by offering two specialized services to its borrowers. “We have a proprietary software system, which enables us to track collateral in detailed fashion. This allows our borrowers to receive collections at their business and submit the collections through a third-party blocked account instead of a lockbox. Because we have detailed monitoring, we don’t require ongoing field exams unless a borrower is in default. The lack of a lock box and field exam requirement presents a significant cost savings to our clients.”
“For businesses, it’s a buyer’s market,” adds Darla Auchinachie, vice president and team leader at Bridge Capital Finance Group. “Companies with solid assets in terms of accounts receivable and inventory can take advantage of the current competitive environment, and lenders will have to remain nimble in order to capitalize on the opportunities.”
Speaking from four different regions of the country, Camerlengo, Simmons, Cooper and Auchinachie were animated when asked about the challenges and opportunities in today’s marketplace. Camerlengo is in Atlanta, GA; Simmons is in Dallas, TX; Cooper sits at MidCap’s headquarters in West Hartford, CT; and Auchinachie works from San Jose, CA. All are experienced asset-based lenders representing companies that share as many similarities as differences. Bridge and Alostar are bank-owned, and all four prefer business that falls within the $2 million to $10 million range with Marquette reaching as far as $20 million. They all operate in a marketplace juxtaposed against the unknowns of election year politics and a troubled European market.
Marquette Business Credit is a generalist lender. “There really is no industry that is a non-starter for us, but we are in a few sectors that some of the smaller asset-based lenders are not. These include retail, transportation and lender finance,” relates Camerlengo. MidCap and Alostar focus on the manufacturing, distribution and service sectors. Bridge Capital is in the Silicon Valley and specializes in technology but provides financing solutions to an array of industries.
All agree that there is ample capital to assist small businesses. “The bigger issue is thin demand,” declares Auchinachie. “When there is a downturn, sometimes businesses can’t qualify for traditional lines of credit, and that is where we come in. Getting creative and understanding just how collateral performs allows us to maintain a strong credit culture and still provide the liquidity that our clients require.”
“If the banks see limited new business opportunities, they’ll hold the tougher deals in their portfolios,” worries Cooper. “If they hold onto the higher-risk rated credits, it limits our opportunities. When they have stronger, new business in their pipeline, they might not invest the time on the tougher deal and instead pass it off to us. As a lender, we need to think and sometimes structure credit facilities outside the box in order to get a deal done.”
A Cleaner, Meaner Marketplace
It’s a challenging environment, but all of the roundtable participants agree there is increasing opportunity. “It’s a very clean market right now,” says Simmons. “When general economic demand returns, we will have a tremendously strong business sector. It is as lean as I’ve ever seen. When the top line moves up, there will be a great benefit to the bottom line. Management today is as wise as their companies are lean; they are not going to make decisions for growth or expansion without considering regulatory and global factors.”
“When I visit companies, we talk a little bit about what’s going on in the world and the economy,” reports Camerlengo. “Generally speaking, I don’t think there is a direct correlation between the large global macroeconomic issues and what affects the smaller middle-market companies domestically. However, in some cases I do detect some discomfort, and that has caused these companies to walk gingerly in 2012 and into 2013. Because of this apprehension, they may refrain from hiring full-time employees and resist significant capital expenditures.”
“The banking system in Europe is stressed, making it difficult for a company to get a business loan,” cites Cooper. “If the turmoil there helps bring traditional manufacturing back to the U.S., we can provide asset-based loan support. There are pockets in every industry that are doing okay, but I would love to see more manufacturing opportunities.”
“When the staffing and trucking industry heat up, it means more workers are needed and inventories are growing as products begin to move,” notes Simmons. “These are predictors of future growth. I am looking at a trucking deal now that I looked at a year ago, and I’m surprised that it is not further along a recovery path. It’s doing fine, but that’s the issue — everything is just doing okay.”
Camerlengo believes specialized, short-run manufacturing is coming back to the U.S. “There is a real need for quality and specialization that you can’t capture overseas. Several years ago, manufacturing started to die in the U.S. because of labor costs, quality and innovation. But companies that moved production overseas are experiencing quality and lead-time issues, and successful companies are running leaner inventory levels up and down the supply chain. It’s very difficult to import small quantities of inventory due to logistical costs. One of our best performing portfolio clients is a specialty textile company in South Carolina, and their top line is growing 10% year over year. Smaller niche manufacturers are great ABL prospects.”
“My greatest concern is the significant time investment we put into creatively structuring facilities only to have the borrower ultimately enticed by a carrot dangled by an unproven financing source,” laments Auchinachie. “Then we lose the opportunity to a lender that may not be able to deliver on its promises. I’ve seen this happen a couple of times this year, and the borrowers have called me to say they wish they had accepted our offer. Relationships matter, and lenders should work diligently to ensure that their clients get the best possible financing arrangement.”
The Election Year Lull
“Every election year provides the opportunity for a business owner or private equity group to procrastinate, to wait and see how the wind will blow,” says Simmons. “Unfortunately, it is essential that businesses wait. They cannot make decisions until they have a reasonable expectation of what employees, benefits and regulatory oversight are going to cost them. I think this uncertainty causes much of the delay in the economic recovery, because management can’t determine their costs and make decisions about expansion and capital expenditures.”
Camerlengo agrees that some companies are sitting back and waiting to see what happens. “We may see real GNP growth after the election, but I’d expect the economy to remain relatively flat until then. It all comes down to consumer confidence, and confidence can come back in the fourth quarter if the right person is in the White House.”
In Texas, where Simmons was born and raised, there is the strong energy sector that has been a stabilizing factor for this economy. “The pain of 2008 probably wasn’t felt here as severely as it was elsewhere. The energy business here, with all the production and services that surround that industry, has allowed startup companies to grow rapidly. Advanced hydrofracturing techniques allow the U.S. to produce more oil than it has in the last 20 years. This will help us long term globally, because we’ll have less reliance on foreign oil. The current administration and its policies are not supportive of the opportunities we have here in the U.S., but I’m hoping it will get there.”
“I know the economy is always a big issue in an election year, but let’s face it, the economy has been a big issue for the past four years,” contributes Auchinachie. “Just because it’s an election year doesn’t necessarily mean that this singular event will improve or worsen any momentum we may be experiencing. We live in a global economy today; the U.S. is but one part of the equation.”
Cooper responds, “I think the remainder of 2012 into 2013 will be spotty in our space. The first half of 2012 has come in waves — we have very busy periods and then it’s slow for a few weeks. Increasing regulation will be part of the picture, no matter how the election goes.”
Marquette is experiencing a major pick-up in its deal pipeline and expects that trend to continue. “Some of my competitors are experiencing the same thing and have the same perspective,” shares Camerlengo. “My perspective comes mostly from my target market, which is the southeastern U.S., but we also see lenders from other parts of the U.S. breaking into the small deal market to capture this anticipated expansion in 2012 and 2013.”
“Performing businesses, regardless of size, will be able to demand very aggressive pricing and structures from lenders,” comments Cooper. “Even in the unregulated, non-bankable commercial finance space, I expect it to remain very competitive this year and next as lenders fight it out to build their portfolios and provide a return to their ownership.”
“It’s unfortunate for us that it is a buyer’s market,” expresses Simmons. “Capital is a critical component of any business, and today it does not demand the premium it should for something that is such a vital part of the business. There are not enough deals out there to feed all the lenders, and this promotes fierce competition. The easiest way to win business is drop the price. Too many lenders lead with their chin and then later complain about being knocked out. If you lead with low price rather than sell value and establish relationships, you really can’t complain about what your P&L looks like a year or two down the road.”
Camerlengo sees more competition in 2012 with a strong commitment by many lenders to finance small U.S. businesses. “The banks have a tremendous pricing advantage over non-bank finance companies because of their cheaper cost of funds. However, these same banks — due to the federal regulatory environment — generally don’t share the same appetite for credit risk as traditional ABL lenders. As a result, they don’t have the back office horsepower required to sufficiently monitor difficult, collateral-dependent ABL transactions. This positions non-bank ABL lenders and factors to thrive. Now is a great time to be in this space.”
Lisa A. Miller is a freelance writer for ABF Journal.