Samuel S. Philbrick, President, Asset Based Finance, U.S. Bank
Warren Mino, President, Webster Business Credit
Perry Vavoules, President, Capital One Leverage Finance Corp.
William Kosis, executive vice president, head, asset-based lending division, PNC
Barry A. Kastner, Head, Specialty Lending, TD Bank

With the Great Recession now officially behind us, the finance community is faced with the daunting task of picking up the pieces and reflecting on the learning experiences of the past two years.

Each year at this time, as part of our annual Marketplace issue, we at ABF Journal like to do a little reflection of our own, checking in with leading asset-based lenders for a review of the year that’s been and a look forward to the one ahead.

What we found this year is an ABL community poised at the gate, like competitive swimmers on the starting platform waiting for the gun to go off. The starting gun, in this case, could be any one of a number of indicators that the economy is in full rebound mode. And while that may not be the case yet, what is certain is that the last three quarters of 2009 and the first quarter of 2010 represented a major turning point for the industry.

Like a phoenix rising from the ashes, the finance community, for the first time in nearly three years, saw opportunity on the horizon, albeit slow-growing and in some cases, so we heard, “lackluster.”

Nevertheless, from our five ABL Roundtable participants it became clear that we are on the brink of something promising as we push further into 2010; but with lenders and borrowers still testing the waters, it’s not entirely clear when they’ll take the plunge. What seems fairly certain, however, is that when they do, they won’t dive as deep as they once did.

A consistent theme is whether the lenders that managed to hold fast during the credit crisis through some combination of tenacity and caution can take full advantage of the rebound while at the same time remaining attentive to the diligent practices that leaner times demanded.

With that in mind, among other things we asked our roundtable participants what ABLs need to do to put these learning experiences into practice. For as the American philosopher George Santayana said: “Those who cannot remember the past are condemned to repeat it.”

As for the past year, the swiftness of the changing markets in 2009 meant that companies were forced to adapt to several distinct phases. Samuel S. Philbrick, president of Asset Based Finance at U.S. Bank, identifies them as decline, uncertainty and stabilization, in that order. “The rapid pace of change in the economy and lending market was dramatic,” he says, reflecting on the past 12 months. “We started 2009 with customers facing an unprecedented drop in sales and, in some cases, this was accompanied by a severe drop in the value of their commodity-based inventories. Borrowing activity dropped significantly as customers retrenched and managed down their working capital.”

Now, he says, there’s at least some sense that the bottom has been reached. “Overall, people are far more optimistic today than they were a year ago,” says Philbrick. “The question now is how steep the growth curve will be coming out of the recession. At this point it seems to be anyone’s guess.”

Warren Mino, president of Webster Business Credit, says he witnessed a similar trajectory over the past 12 months. “Financing in 2009 started out very limited, but by the end of the year and the first quarter of 2010, many banks had begun to look for more opportunities,” he says. “The capital markets began to put liquidity back into the market.”

But Mino cautions, that doesn’t mean things are back to normal yet; he notes that borrowers with limited capital will continue to struggle until the many factors that make up a healthy economy fall back into place. “There may still be a challenge, with weak employment and the delay in getting all parts of the economy going again,” he says.

Mino suggests that it may ultimately fall to the borrowing community itself to be the catalyst to this turnaround. “Business owners need to have confidence that they know their cost of business and can make a profit, [and] consumers will need to have confidence to spend and invest, which will also drive the economy.”

Perry Vavoules, president of Capital One Leverage Finance, agrees that recovery will be largely contingent on the will of borrowers. For instance, he says, before the lending community can find its comfort zone, there needs to be a rebound in demand for capital and the projects in place to put that capital to use.

“The last year was best characterized by lackluster loan demand and low utilization rates,” Vavoules says. “As we start to see overall loan demand rise, growth in existing portfolios will provide new money opportunities that may reduce pressure on ABL budgets and avoid the need for aggressive pricing actions.”

Vavoules says he believes low utilization rates will gradually subside as borrowers start to rebuild depleted inventories, confront higher receivable balances and restore capital spending programs.

Filling the Void
Official industry data tends to support the theory of a lackluster early 2009 followed by a second half and first quarter characterized by subdued momentum.

According to the Commercial Finance Association (CFA), new credit commitments in the first and second quarters of last year were down 3.8% and 7.3%, respectively. Then, in the third quarter, new commitments spiked nearly 30% only to level out in the fourth quarter. (At press time data for the first quarter of 2010 was not available).

William Kosis, EVP and head of PNC’s asset-based lending division, thinks part of this increase in activity is a function of an early recovery in which businesses are again ready to invest but traditional lines of credit remain elusive. He says he saw “measured improvements” last year on the credit side, and a “significant” return of borrowers to the asset-based sector from corporate or cash-flow lending arrangements due to the weak credit environment.

“As the competitive landscape shifted, with some of our cash-flow competitors withdrawing from the market and with corporate lenders tightening their structures, many potential clients naturally flowed our way,” he says. “We have been able to work with quite a few companies that we probably would not have had an opportunity to do business with before the crisis hit.”

Barry Kastner, head of specialty lending at TD Bank, says the same thing has occurred at his shop. He says astute asset-based lenders with the capital to support expansion benefited from dwindling competition among ABLs as well. “Opportunities presented themselves as a result of the choppiness in the market,” he explains. “At a time when so many lenders were exiting the ABL market, or [were] distracted by mergers, we took advantage of the opportunity to create a true middle-market and large corporate ABL presence.”

Echoing Kosis, Kastner says a generalized dissatisfaction among borrowers with traditional lending sources will carry over into post-crisis opportunities for ABL companies in a position to embrace them.

“Typically, the first two years after a recession are banner years for ABL,” he says. “We’re finding that many good companies are dissatisfied with how their lenders treated them when times were tough, and are looking for other, more supportive and financially sound alternatives.”

Kosis says it doesn’t hurt that the credit crisis brought ABL more into the mainstream than it had been during healthier times.

“Over the past three or four years, we have seen the perception of ABL completely change,” he says, “evolving from a ‘lender of last resort’ to its current status as a viable resource for equity sponsors and growing companies. ABL has emerged as the financing option for a company looking to leverage up in a deleveraged economy.”

Keeping it Simple
While 2009 saw its share of transitions, one thing that hasn’t changed is the nearly universal shift back to time-tested business strategies in lieu of the aggressive and some would say reckless behaviors that reigned pre-recession. “There is no question that in 2009 those lenders that were active in the ABL market returned to more basic ABL terms, and structures were tighter than they were over the previous few years,” says Kastner.

He says that only recently has competition been driving some more “creative” structures as borrowers find they have more financing choices than a year ago, which naturally forces lenders to become more aggressive. Kastner says this trend will likely continue, however, he adds, “I believe structures will continue to be much more rational than those of the past few years — at least for a while.”

Philbrick says that borrowers are going to have to adopt new expectations as the market recovers. “The reality is that the changes in pricing and structure are not temporary and the deals that borrowers received four years ago are simply not available in today’s market,” he says. “Going forward, it will be interesting to watch how long the ‘new normal’ remains in place.”

That term, the “new normal,” is one we’ve been hearing a whole lot of lately. In fact, for those of us who cover the finance industry, it seems to be everywhere. There’s a book, The New Normal, Great Opportunities in a Time of Great Risk (by Roger McNamee); several websites (including and; and countless news features and academic studies on what the economy will look like post-recession.

A September 2009 Brookings Institution report, “The New Normal For the U.S. Economy: What Will It Be?” foresees lower household debt, higher personal savings, and less consumption as a share of GDP. Translated to the commercial finance world, Mino explains: “The new normal can be reduced loan demand, deleveraging of all areas of the economy, reduced values, and some markets or production going off-shore and not coming back.”

For the most part, though, the ABLs we talked to tend to put little stock in the idea of an entirely new market paradigm and prefer to see the new normal as a set of natural responses to changing market variables.

“I tend to think what we are seeing in the market today is, really, just a normal part of the cycle; very similar to what we saw in the early ‘80s or ‘90s when lending tightened up,” says Kosis. “After loosening too far, structures have to tighten, and will loosen again as the environment allows for it.”

Most importantly, they say, is that lenders take away the lesson that there are simply good practices and not so good practices, and it shouldn’t really matter what state the economy is in.

“For successful ABLs, the rules don’t change regarding prudent loan structures,” says Vavoules. What he seems to be saying is that there is no new normal per say, just different approaches to the same age-old fundamentals. For Vavoules, successful lenders are those that remain disciplined in good times and in bad.

“Problem accounts can happen in any environment and the most successful ABL lenders are those who maintain a consistent and disciplined lending approach throughout the cycles. A good ABL loan structure is not dependent on economic variables and is designed to protect lenders from unforeseen circumstances during boom or bust periods.”

What Lies Ahead
While some analysts continue to watch market indicators — like unemployment, factory orders and GDP — for any and all signs of recovery, others have gone to the source, polling companies about their plans in the coming year.

At the end of April, Ernst & Young polled 800 senior executives around the world and found a majority positioned for increased investment in both companies and goods. Among their findings, 57% of businesses said they are likely to acquire other companies in the next 12 months, almost double that of the 33% six months ago, and 62% expect financing to fund major capital projects and acquisitions to become available in the next 12 months. ABLs say such optimism, whether or not completely founded, is a good indicator.

“It’s hard to say whether the funding for major capital projects and acquisitions will be available to that extent,” says Kastner, commenting on the report, “but is does appear that sources of capital are indeed coming back to life. The high-yield market is hot, and recently we have seen the re-emergence of second lien lenders.”

“With fewer players in the ABL market and diminished cash-flow lending, the competitive outlook for asset-based lenders is more favorable than we’ve seen in many years,” adds Vavoules.

Mino says companies that managed to weather the “Great Recession” will be “stronger, smarter and have the management to take advantage of the new opportunities that lie ahead.” He adds, “Over the next year and beyond smart ABLs will be lending to a growing economy. We are the working capital that feeds the customer base with the ability to buy and produce inventory. We must be ready for these opportunities and help the U.S. economy to expand.”

But ABLs also can’t take for granted that the momentum the sector picked up during the crisis will remain once traditional lenders flood back into the market. Instead, they will need to be especially attentive to the borrower community to ensure the message they got our in 2008 and 2009 is remembered into the future.

“The recession was a time of great opportunity for ABL, in many cases allowing for record-setting years in terms of customer procurement as ABL proved itself a viable form of financing in even the greatest of economic uncertainty,” says Kosis. “[But] to capitalize on that momentum, ABL shops need to build on the strengths they have already demonstrated: consistency, creativity, and most importantly, flexibility.”

Philbrick says for the sector to continue to enjoy its increasing popularity it is critical that ABLs focus on communicating to borrowers the benefits of the product, especially those which will help them succeed in an improving economy. “Smart ABLs will focus on continuing to invest in their capabilities to meet the growing needs of their customers,” he says. “Competition is only getting stronger and to be a top-tier provider of ABL you need to have the best people and processes and to be responsive and provide solutions that help clients succeed.”

“Continuing the momentum post-recession and retaining good clients is always a question of relationship, and providing the client with strong service and alternatives,” says Kastner. “We have found that going the extra yard for a client results in extreme loyalty, in most cases.”

Christopher Moraff is associate editor of ABF Journal.