Finance professionals in many ways depend on the cyclical nature of their industry. As such, they count on certain inevitable realities such as the belief that history repeats itself, on boom and bust cycles, the phenomenon of expansion and contraction, the expectation that what goes up, must come down … and go back up again. Essentially, they understand that the more things change, the more they stay the same.
Where We Are
This is especially true for secured lenders, perhaps now more than ever. As an industry, asset-based lenders (ABLs) have emerged from each economic downturn larger and stronger than when it began, and it appears that the Great Recession is no different. A May 2011 survey by the Commercial Finance Association indicated that environment and performance for its ABL members are improving, with total credit commitments (1.2% over Q1/10), committed credit lines (0.8% over Q4/10), new credit commitments and utilization all up. Even down is a sign of up, with a decreased percentage of non-accruing asset-based loans in the first quarter translating to an upswing in portfolio performance.
The industry’s resilience is built into the core of its model. Known years ago as the “lenders of last resort,” ABLs are built to succeed — and to help their customers succeed — especially when times are tough. With less stringent covenants and direct focus on liquidity and collateral, a secured lender can be flexible enough to help its customers achieve their financial goals even during economic uncertainty.
This flexibility means, typically, that industries that are out of favor are actually areas of great opportunity for an ABL. An ABL is frequently willing (and flexible enough) to withstand a significant level of turbulence with a client, and so can provide much greater continuity of service through an economic downturn. Because of the consistency, stability and depth of the relationship between lender and client, this also frequently means that a secured lender is on the cutting edge for indicators of early recovery.
The recession has had far-reaching implications for companies of every shape and size, perhaps most embodied by construction and its supporting industries. Yet while traditional lenders remain wary of an industry characterized by decreased spending, falling employment and rising delinquencies, secured lenders are beginning to see hints of recovery through their clients in associated industries. For PNC Business Credit, demand and loan activity are beginning to pick up for clients in material handling, transportation, trucking and manufacturing. Even staffing companies are getting back into the game, often an early indicator of recovery, as companies are likely to ramp up hiring efforts first on a temporary basis.
Where We’re Going
Having never really come off the field in the first place, secured lenders are uniquely positioned to take advantage of the opportunities created by even the possibility of recovery. One such opportunity on which to capitalize is the increased interest from private equity groups (PEGs) that are ripe for interaction with secured lenders.
The recession hit private equity hard, too, as valuations plummeted, making opportunities to acquire companies scarce. Funds that had grown used to a bounty of deals and demand were suddenly scrambling to save, or even to make, investments. With companies failing to live up to forecasts, scarce lender capacity and a need to focus on their existing portfolios, it was very difficult for private equity groups to put the funds raised in 2007 and 2008 to work.
As many banks and cash-flow lenders struggled with their own balance sheet crises across the downturn, these groups turned increasingly to secured lenders, which were able to step in and provide additional capital to help PEGs save their investments. Even as the economy slowly crawls towards recovery, these PEGs will continue to seek out strong, stable partners to help deploy the $477 billion in capital overhang that remained as of September 30, 2010, (PitchBook 2Q 2011 U.S. Private Equity Capital Overhang Brief), and they are not likely to forget the consistency, stability and overall ability to get deals done demonstrated by the ABL industry.
The Company We Keep
Of course, with heightened relevance and visibility comes additional competition. While secured lenders are seeing perhaps record-breaking activity, they are doing so in a much more crowded field. Having seen how well the industry weathered the recession, banks and non-bank lenders are getting into the ABL game, which has resulted in their return to the marketplace far more quickly and aggressively than was previously anticipated.
Rates, especially in the U.S., fell fast and hard, and while they seem to have hit a psychological threshold, competition will likely drive secured lenders to stretch further on structure than they may be accustomed to doing.
Small World After All
Outside of the new competition and the drastic changes to the U.S. banking system, lenders will find the post-recession landscape into which they are emerging much changed. Technology and social media channels have made the world a much smaller place. Recent advances in technology make it easier than ever for companies to talk in real-time to partners and customers around the globe, and have brought advice and competitive information right to a borrower’s fingertips.
For a lender, this ultimately translates to new standards of speed, information flow, response and overall communication. The requirement to “stay in touch” is amplified by the expectation for immediate response. Moreover, as customers and competitors increasingly use social media to network and even to source relationships, it is imperative for a lender to develop a thoughtful approach of how it may fit into and be able to leverage these new channels. After all, if a company is not out there talking to its clients, it’s a good bet that someone else is!
The new ease with which international communication can be accomplished takes on additional significance as ABL gains traction as a financing option in global markets. As an example, ABL has grown steadily in the United Kingdom over the past ten years, with total advances for Q1/11 up 9% over the same period last year (Asset Based Finance Association).
Secured lenders must build on the established strengths that have allowed them to emerge as a primary financing option in the U.S. to carry the industry toward global popularity. Such strengths include:
Stability: Markets around the world are recovering at different speeds. In the experience of PNC Business Credit, U.S. financial trends tend to take 12-18 months to cross the Atlantic, thus giving U.S.-based shops a certain advantage. With the UK beginning to climb out of the recession, companies are seeking funding to support working capital needs. Because banks have come through the financial crisis more quickly in the U.S. than in the UK, U.S.-based secured lenders are in an ideal position to capitalize on their strength and security — especially those shops connected to well-capitalized, liquid institutions. Their extensive experience in helping companies achieve their financial goals in good and bad economic times makes ABLs an excellent fit for international companies beginning to emerge from the recession.
Consistency: Many of the practices that have helped ABLs evolve past their stigma as “lenders of last resort” in the U.S. will similarly help to establish relevance internationally. The in-depth research and understanding of a client and its industry that allows a secured lender to stay with a deal even when times are tough should similarly be applied to international prospects.
Historically, U.S.-based shops have struggled against their perception as “briefcase bankers.” This is especially true in markets such as Canada, where the banking community is historically comprised of just a few large institutions. Having a material physical presence based in the country of business can also go a long way to bolster a positive impression, and to develop a trustworthy reputation as a “local” institution.
It is similarly imperative for a lender to develop a relationship with a reputable law firm based in the country of business. Legal and regulatory landscapes can vary as much as physical ones, and it is necessary to have a strong legal partner on the ground to help navigate the new terrain and to successfully build an effective program.
Flexibility: It is not at all uncommon for a company to be based in one country, with manufacturing operations in another and distribution services in still three more. This reality makes Asian-Pacific deals, dominated by trade, especially challenging. While direct lending is still the preferred route, secured lenders may have to stretch the limits of their flexibility and creativity to design a financing package to meet a customer’s unique needs.
One such option is to look at the supply chain. By lending on some portion of in-transit inventory, a secured lender can give the client room to increase its borrowing base and to better position itself for future growth opportunities. As trade grows more dominant and manufacturing takes on an even more international tone, it only makes sense that lenders will need to adapt.
It’s Not What You Know…
Finally, there will always be a certain reciprocity of trust and engagement necessary between secured lender and client. Three qualities in particular emerge as essential to a successful relationship:
Management: A quality, sophisticated management team at the client is one of the most important factors that a secured lender looks for in a company. Management should be actively involved with working capital assets, focused on growing the top line while maximizing the bottom line through controlling expenses and being open to new strategies to better position their company for financial achievement.
Communication: It is critical that a company has strong, open dialogue with its secured lender. The better informed a lender is of changes in its client’s business strategy and plans, the better prepared that lender is going to be to support and work alongside its client to get things done when the opportunities present themselves.
Perspective: A client or prospect should look at its lending relationship in totality, rather than as a sum of its disparate parts. A decision should never be based solely on cost, but rather on the combination of pricing, service and support. As an experienced lender will note, many a business has been lost for the sake of a quarter of a point. Therefore, in the long run, it is important to look at how a lender has worked with its clients, both in times of prosperity and struggle, to determine if it will be a good fit for the business in question.
The recession, evolution of communication technology and overhaul of the global banking landscape have forever changed the environment in which secured lenders get deals done. However, by leaning on the same established strengths of stability, consistency and flexibility that have allowed them to emerge from each recession stronger than they went into it, ABLs are well positioned for continued growth and development around the globe. After all, the more things change, the more they stay the same.
This article was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at the reader’s own risk.
Peter J. Mardaga is executive vice president and division executive for PNC Business Credit, overseeing the teams responsible for new business development and portfolio and relationship management for PNC’s Mid-West region and Canada. Mardaga has nearly 20 years experience with PNC, and has been with PNC Business Credit since its formation in 1997. He earned both his Bachelor’s degree in Economics and Master’s degree in business administration from Fordham University. Mardaga is a member of the Association for Corporate Growth (ACG), Commercial Finance Association (CFA) and Turnaround Management Association (TMA).
W. Craig Stillwagon is executive vice president and division executive for PNC Business Credit, overseeing the teams responsible for new business development and portfolio and relationship management for PNC’s Eastern region and the UK. Joining PNC as part of its formation in 1997, he has more than 25 years experience in middle-market lending. Stillwagon holds a Bachelor’s degree in Communications and Marketing from Denison University, and is a member of the ACG, the TMA and the CFA.
Thomas J. Stoltz is executive vice president and division executive for PNC Business Credit, overseeing the teams responsible for new business development and portfolio and relationship management for PNC’s Western region. Stoltz joined PNC Business Credit in 1999 with more than 20 years in asset-based lending experience. He has a Bachelor’s degree in Accounting from Shippensburg University and a Master’s in business administration from Claremont Graduate University’s Drucker School of Management. He is also a member of the CFA and the ACG.
PNC Business Credit, the asset-based lending division of PNC Bank, National Association, a member of The PNC Financial Services Group, Inc.