Seth Benefield, Senior Vice President, Bank of America Business Capital
Seth Benefield,
Senior Vice President, Bank of America Business Capital
Michael Haddad, President, Capital Finance, Sterling National Bank
Michael Haddad,
President, Capital Finance, Sterling National Bank
Jim Hudak President, CIT Commercial Finance
Jim Hudak
CIT Commercial Finance









Despite the same humdrum market conditions of slow but steady economic growth, pricing compression and intense competition, today’s ABL leaders continue to thrive. As we wrap up another year, they demonstrate their determination to overcome obstacles, serve customers and expand market share.

We asked five ABL leaders about the year behind and what’s ahead. Though each faced inevitable surprises and unforeseen developments, they showed the resolve and optimism that characterizes leadership and achievement in our dynamic industry.

“One of the biggest surprises of 2018 was a shift on the ABL side as the bigger banks stepped up to much larger hold positions,” says Jim Hudak, president of CIT Commercial Finance. “With the current trend, the bigger banks club up and take larger holds. Instead of having one or two leads with a lot of participants, there are only four or five lenders.”

“There was no shortage of bankruptcies and restructurings within the retail and grocery sectors, but none were a surprise given the pressure put on brick-and-mortar retailers,” says Joseph Nemia, head of Asset Based Lending at TD Bank. “Companies with over-levered balance sheets and far too many stores found it hard to compete, given the shift in consumer preference. Although not great news for the future of this sector, it was a proof-point that well-structured and closely monitored borrowing relationships did not lead to credit losses for asset-based lenders.”

“We started 2018 with a plan to grow our ABL business by 100% over the next three years,” says Michael Haddad, president of Capital Finance at Sterling National Bank. “The plan included hiring additional talent and booking more business. We quickly found out that the availability of quality business development officers was limited. The other big surprise is that we are 51% ahead of last year in the number of deals we have looked at, but with a lower closing rate, thanks to the unending stream of new entrants into our ABL world and aggressive competitors offering dangerous loan structures.”

“Maybe the biggest surprise is how little the lending environment has changed,” says Seth Benefield, SVP of Bank of America Business Capital. “We expected the ABL landscape to remain competitive, and it has. Market conditions remain favorable for issuers, and there is ample liquidity. We also anticipated that economic fundamentals would remain favorable, which has proven accurate. We continue to experience good deal flow, and asset quality is strong.”

“The economy continues to chug along in spite of the uncertainty, the noise and the dysfunction that bombards us every day,” says Mike Sharkey, president of MB Business Capital. “Confidence remains high, and we are seeing nice organic growth within our portfolio. Our 2018 results are well ahead of projections and far above last year.”

Michael Sharkey, President, MB Business Capital
Michael Sharkey, President,
MB Business Capital
Joeseph Nemia, Head, Asset Based Lending, TD Bank
Joeseph Nemia, Head, Asset Based Lending,
TD Bank

A year ago, the hot topic in the news was interest rates, but now everyone is talking about tariffs. “Tariffs are a concern to our customer base, so we monitor the conversations closely, but so far it is business as usual,” Haddad says.

“From what we see, tariffs on steel are having the biggest impact,” Sharkey says. “In general, our customers have been able to pass those increases along, and they are realizing significant profit on their existing inventory. The real effects will be felt long term as companies do or don’t locate alternative suppliers on both the customer and vendor sides. Higher prices will also negatively affect demand.”

“Until the picture becomes a little clearer, it’s difficult to place a dimension on the overall impact,” Nemia says. “In anticipation of potential tariffs, some of our customers and prospects saw an increase in shipments to the U.S. during the first part of the year, which put pressure on prices of products subject to tariffs. It’s a topic that is definitely top of mind with customers and credit committees.”

“To date, we have seen commodity prices negatively affected, particularly copper, which has had its impact on our client base,” Benefield says. “We are following the trade agreement negotiations between the U.S. and its trade partners. The situation remains fluid, and we expect the negotiations to play out more over the coming months.”

“If a company imports material to make or sell its products, those materials may get more expensive,” Hudak says. “That raises the price of inventory, and that can create a need for greater working capital. It can also create an opportunity for an ABL lender that predominantly finances accounts receivable or inventory. From the standpoint of credit quality, banks lending to companies need to be cognizant of increasing costs and, therefore, gross margin compression.”

New Players, Approaches & Opportunities

The influx of new ABL players has not let up. “The competition is ridiculous!” Haddad exclaims. As chair of the CFA membership committee, he sees a shift. “Right now, we’re seeing increasing numbers and more diversified players coming in. Some of them have nothing to do with ABL but want to test the value proposition for joining the CFA. One recent applicant was a national real estate financier and wanted to join as an asset-based lender. They thought they might find loan opportunities by networking with the CFA members who might also help them create a new, exciting ABL-related vertical that the mainline players like ourselves haven’t thought of.”

“We see a lot of sole lender transactions with the regional banks and smaller community banks,” Hudak says. “It might be a regional bank that’s had a relationship with the company for years. Instead of trying to syndicate the deal, they do it alone, remain the sole lender and take a larger hold position.”

“Total relationship returns continue to be a key focus for lenders, and that heightens the competition to lead deals,” Benefield says. “The lead left lender typically is in the best position to provide borrowers with cash management and other ancillary bank products.”

“All banks are lending aggressively and doing the better deals on a cash flow, borrowing base or blanket lien basis,” Sharkey says. “Finance companies, many of whom are new, are doing tougher deals aggressively without blocks or other protections. Others are doing aggressive cash flow deals with the sponsors with no regard to collateral values.”

“Larger banks have appetites for outsized hold positions, the depth of the capital markets remains deep, and there isn’t a plethora of new deals, so the customer is a net winner as it relates to both price and structure,” Nemia says.

Each of our roundtable participants managed to increase business volume, despite the challenges. “TD ABL has added a national capability to serve larger well-rated companies,” Nemia says. “We believe that this expanded market coverage will generate additional revenue as we continue to build awareness of the TD brand. We are also beginning to leverage our team’s deep restructuring industry expertise, because more companies, especially in the retail sector, are experiencing challenging market conditions.”

“We’ve been using the ABL product in industries where we have very good knowledge of the sector,” Hudak says. “For example, we’re using the ABL skillset to bank companies in the financial services sector like BDCs. We’ve used our maritime experience to develop structures based on a pool of vessels. Because of our knowledge and the impact on asset values over a cycle, we feel we can arrange the appropriate borrowing base and advance rates. Our extensive experience in the retail space helps us with transactions where we might provide additional credit for intellectual property or brand value as part of the borrowing base.”

“We have some quality healthcare talent in the bank, and we’re talking to others, so we may launch a healthcare vertical,” Haddad says. “We recently beefed up our equipment finance capability by buying a company in Long Island. Now we have more than a billion out in equipment finance, so we will come to market in 2019 with a new look and new verticals.”

“Our aim continues to provide best-in-class products and solutions that include credit, treasury, risk management and investment banking capabilities,” Benefield says. “We have consistently maintained an industry-leading lead left ABL market share, and we are focused on growing our middle market lending practice for companies seeking financing solutions of $5 million or more.”

“We stay the course with sound lending practices, but we believe our experience allows us to see each individual deal in a unique way,” Sharkey says. “That allows us to craft creative solutions for each borrower’s situation. Each deal is different based on market factors, management strength, seasonality and the collateral aspects of a deal. We are just getting started in Canada. We are merging with Fifth Third, and that will allow us to compete on another level.”

M&A and Regulatory Oversight

“M&A activity continues at record levels,” Benefield says. “However, conditions appear to favor strategic buyers over financial sponsors, which suppresses new ABL financings. Further, platform investments by private equity have abated in 2018 versus 2017. We are seeing private equity firms execute more add-on acquisitions — ‘buy and build’ — which helps overall loan outstandings.”
“There’s a lot of money in the private equity space, but we can’t chase deals and do them for the sake of doing a deal,” Hudak says. “We need to make sure the companies are sold for the right valuations, which in turn will drive the capital structure. When private equity groups have to stretch to buy companies and therefore pay a higher multiple, it is imperative that we feel that the leverage and the capitalization of the company are appropriate.”

“There are corporate-to-corporate deals going off at record-level numbers and dollar amounts,” Haddad says. “Transaction multiples are at all time highs of nine, 10 and 11 times EBITDA or more. We bid on an M&A deal and thought we were fairly aggressive about it, but we weren’t even close. We learned there were 14 different books put out on the street for that deal! The request was a 50/50 split between a revolving line of credit and a cash flow term loan, all from a private equity group. This deal will probably wind up going off at 10 times EBITDA and get fully financed. We drew a line in the sand and said we can’t play in that deal.”

Sharkey says their close relationship with SBICs across the country allows them to compete effectively with banks and cash flow lenders. “When we do lose deals to expensive cash flow or unitranche lenders, we continue to call on the sponsor for when the company is ready to refinance or recapitalize. Oftentimes a sponsor will go the cash flow route to get a deal closed quickly and, within a year or so, do a refinance to bring its costs down.”

“There have been a number of transactions in the larger ABL space that have been either delayed or prohibited after being reviewed under the Hart-Scott-Rodino Act lens,” Nemia says. “Given the limited overall M&A market for ABL, these regulatory decisions affect the growth of banks and lenders focused on providing M&A financing for the upper end of the ABL market segment.”

There has been some loosening of Dodd-Frank regulations, but has it had any impact on our lenders or their competition? “We have a strong credit and compliance culture and will continue to work within our risk framework, which is in compliance with our applicable regulatory requirements,” Benefield says. “We have seen no changes to the competitive landscape from any recent regulation changes.”

“I would categorize it as a simplification rather than a loosening of regulations,” Hudak says. “This has translated, in our business, to a very constructive dialogue with our regulators. We want to grow and seek new opportunities but make sure we are doing that in a prudent way. We were categorized as a SIFI and had additional regulatory requirements. Now we are no longer a SIFI, so that’s a positive for us in terms of certain reporting.”

“I am hoping that regulations on the corporate side will loosen,” Haddad says. “The banking regulatory environment is costly and, in my opinion, not entirely productive. There needs to be some level of oversight, but right now we have too much oversight, especially on the corporate side. Loosening would lessen costs, drive efficiency and ultimately allow us to be more competitive.”
“We see intense competition from the regional banks, and I suspect that, to some degree, it is coming from loosened regulation and low loan losses,” Sharkey says. “The competition from smaller banks has certainly heated up.”

Nemia has not seen any material change to their appetite to grow the ABL business and continues to focus on “business as usual”.


Fintechs & Private Equity

“Fintechs are really about driving operational efficiencies,” Hudak says. “Our business is high touch and requires a lot of credit adjudication and due diligence. We certainly use technology to help us be more efficient in gathering, manipulating and making assumptions about data, but I don’t feel we directly compete against fintechs at our end of the market.”

“Fintechs have made a big push into the payments business, and their data-driven models are clearly pointed at smaller opportunities given the relative size of the opportunity,” Nemia says. “I believe that the data and analytics approach employed by fintechs can be applied to help identify new markets for ABL as well as provide portfolio management with more robust information to determine the risks inherent in a credit relationship.”

“There are other slightly larger asset-based lenders that are putting together online platforms,” Haddad says. “Their model is to outsource a lot of the back-office work to places like India and the Philippines to keep costs low.”

“We use technology and the internet actively and extensively to build our brand and to communicate with the market,” Sharkey says. “At the same time, it is a people business that requires us to win confidence and create unique, workable solutions for each situation we encounter. I don’t know how you could operate in our segment of the market without that creative and personal touch.”

“We certainly are aware of the substantial capital being invested in the fintech space, and our company continues to invest in new, enhanced digital capabilities to better serve our clients,” Benefield says. “We expect that digitalization will continue at an accelerated pace, and we will continue to proactively meet our clients’ needs as technology evolves.”

The Wall Street Journal recently reported that private equity firms are flush with cash and starting to structure loans, including smaller loans that banks don’t want to handle. “I do see this as a growing trend, but it’s really not a new phenomenon,” Nemia says. “Some private equity firms have used this financing approach to remove execution risk as well as improve ROE. The pricing on these transactions tends to be higher than a traditional ABL revolving line of credit, which would justify the overall risk return.”

“We primarily see alternative lenders filling voids for companies that cannot access traditional debt markets,” Benefield says. “Typically, these are highly leveraged situations, deep turnarounds or in asset classes that are not traditional ABL. We do partner with some of these lenders in providing solutions to our clients. An example would be a situation where we provide a revolver facility, and the alternative lender provides a first or second lien term loan.”

“We see private equity groups augmenting their deals with debt,” Sharkey says. “That often leaves the senior lender with an unfunded revolver or a line with very little usage. That is not something that interests us.”

“It makes perfect sense for a private equity group to get into lending,” Haddad says. “With sky-high multiples, some lenders may start to pull away, especially if the economy slows. As interest rates go up and credit quality suffers, the economy will start to tighten. The PEGs will put more and more of their money — with the fund approval of course — into taking these deals off the street. They can then sit on the deal for six months or longer as they wait for marketing conditions to stabilize. Then they can come back to the market, refinance and redeploy.”

“The cost of funds for private equity firms is much higher than a bank, so they must earn greater returns,” Hudak says. “As a result, they put their money to work in things that often involve more embedded risk or risk that would not fit the regulatory guidance of a bank. In some cases, private equity can provide solutions for more troubled or challenging credits that a bank might hold in their workout groups. To the extent that private equity can be creative in restructuring and refinancing borrowers, that is a positive for banks.”

Making New Year’s Plans

Nemia intends to leverage TD’s enlarged sales force and expand geographic coverage to fuel growth in 2019. “Some of the risks for growth will be the shrinking of traditional retailers that continue to be disrupted by online and omni-channel business models. In addition, a strong term loan B and high yield market in a rising rate environment could result in borrowers choosing a long-term debt product with a fixed rate of interest.”

Sharkey notes MB’s merger with Fifth Third will expand its world considerably. “We will be able to do bigger deals, have more products to sell and have access to an enormous base of commercial lenders across their footprint in locations where they are not currently offering middle market ABL under $15 million.”

“Absent an unexpected geopolitical event or other unexpected shock to the system, we anticipate the domestic economy to continue its growth,” Benefield says. “The economic backdrop remains favorable with strong fundamentals and corporate earnings, coupled with high liquidity and a still modest interest rate environment.”

While he doesn’t expect the economy to cycle next year, Hudak says you always have to plan for it. “We need to remember that when we underwrite our credits, we can’t count on just the good times and need to ensure that there is financial flexibility for our borrowers if they do cycle.”

Sterling is also poised for growth but with some caveats. “My apprehension stems from my ABL brethren who are aggressively over-lending,” Haddad says. “This might result in some opportunities for us, but it will also cause some turmoil and dislocation in the industry. My concern is about the repercussions throughout the industry as those lenders who were way too aggressive in 2017 and 2018 start to take some hits.”