Higher rates, money tightening and interference from regulators following regional banking turmoil in 2023 have severely affected the banking industry. Bank leaders across the asset-based lending space sat down to discuss what it all means for the bank ABL sector.

In March 2023, the collapse of three U.S. banks triggered what is now considered to be the most significant banking crisis within the last decade. A year later, the banking industry is still recovering, and in the asset-based lending space, banks are evaluating a different approach to business, emphasizing client relationships and looking at new opportunities.

How would you characterize the bank ABL space nearly a year after the bank collapses of last spring?

BRENT HAZZARD: While there have been some minor adjustments around the edges — with investors in deals occasionally requiring additional economics — the good news is that there really was no massive shift, and at this point, the appetite is generally back to where it was before those idiosyncratic bank failures last March.

COURTNEY JEANS: Bank ABL lenders’ priorities have changed. Liquidity and deposits have become a priority for asset-based lenders. Many lenders remain active in the market and are being particularly intentional and strategic around the transactions they support. Many asset-based lenders are pursuing fewer credit-only transactions, given the increasing cost of capital, and are pursuing new credit opportunities with a full relationship in mind.

ABBY PARSONNET: The bank ABL space remains highly competitive in a challenging environment, although not for the reason we normally prefer. The undercurrent of higher interest rates impacts the business in myriad ways. We are seeing challenges in some thinner margins and capital-intensive businesses due to the higher rate environment, as well as less private equity deal activity. However, that’s more than offset by the volume of cash flow deals that are now better suited for ABL.

KURT MARSDEN: Bank demand for ABL loans remained solid, but we may have to reach out more broadly to a larger group of banks to find the right partners who find the returns of a particular transaction acceptable, especially on syndicated transactions. We have witnessed a tightening of the money supply, which has made banks more sensitive about their returns, and many have needed clients to provide them with economics from other bank products in addition to the interest income from the loan in order to participate in the transaction. Despite this shift, we have continued to find appetite in the market for well-funded and well-structured loans.

How would you characterize the longterm effect of the bank collapses of last spring on the banking environment, specifically the bank ABL space?

HAZZARD: The most significant impact will be any changes to regulatory requirements, including changes to institutional requirements regarding the amount of capital that needs to be set aside for revolving lines of credit. Right now, it’s unclear what those changes might look like.

JEANS: I believe we are seeing more lenders look at the value a relationship-focused approach to service — especially in large syndicated transactions — can have on longterm success. Additionally, bank asset-based lenders are evaluating new opportunities from both a credit and return perspective. Financial service providers increasingly seek broader relationships with clients, rather than providing only one type of service or specialty capability. Both the client and the bank can benefit from that fulsome approach to service, and I think this is a new dynamic more borrowers have come to expect.

PARSONNET: At Webster Bank, like many others, we certainly paused on new credit business as we gauged the environment while continuing to meet the needs of clients. Webster’s liquidity position remains strong given our substantial branch network, as well as our leading position as a provider of HSA accounts.

MARSDEN: We didn’t see a significant change in our business other than an increase in conversations with clients and prospects around deposit services, as many companies focused on stability during that time period. In terms of the asset-based products, we saw demand continue regardless of what was going on in the regional banking space, but there was more of a focus on returns, which influenced appetite to a greater degree than what we experienced a year prior.

How concerned are you about the changing regulatory environment, whether due to new capital requirements or anything else, and why?

HAZZARD: I think changes to regulatory requirements are likely to be the most significant long-term impact of the idiosyncratic failures in the banking sector last spring. At this point, it is still unclear exactly what those changes might look like but, industry-wide, we will adapt to whatever the new requirements are.

JEANS: We feel confident about our positioning and our ability to adapt overall. Regarding the recent capital and long-term debt proposals, we are hopeful that the agencies will tailor these regulations based on the size and complexity of the various banks, consistent with the law. However, it will be some time before we know the final regulations for these areas.

PARSONNET: As with all prior regulatory changes, we will face it head-on and ensure compliance. The industry as a whole will have to adjust to the changes.

MARSDEN: The regulatory environment is always evolving and always will be, and bank ABL lenders need to do the same. Given the size of Wells Fargo, we are already subject to higher capital requirements and enhanced supervision, so our perspective on these potential changes would be different from those of our ABL peers operating in smaller institutions where the impact may be greater.

Currently, I’m more focused on understanding Basel III endgame and how it could increase the cost of capital for ABL businesses. Many organizations have provided their perspectives to regulators on the proposed rule, including feedback on the treatment of collateral for ABL businesses, which I hope will be considered as the rule gets finalized. Ultimately, we are focused on adhering to any regulatory changes so we can continue to deliver for our clients within the framework.

The Federal Reserve indicated it is expecting to cut rates in 2024. How might such cuts impact your organization’s strategy/performance?

HAZZARD: Rate cuts are generally a positive because they bring down the cost of capital. As a result, you tend to see more growth in the economy and greater demand for financing. ABL can help companies fund
their working capital growth. Lower rates also tend to spur additional M&A activity, and ABL revolvers are commonly used in M&A transactions as the working capital facilities for private equity sponsors.

JEANS: Rate cuts will drive more activity from M&A, organic growth, capital investments and working capital expansion, all of which will increase leverage and usage, which tend to increase ABL volumes. Borrowers use ABL when there is a growth cycle because they can fund their initiatives with more debt, requiring less equity.

PARSONNET: Webster’s core banking business is moderately sensitive to shifts in interest rates. With a balance sheet mix of loans that reprice faster than deposits, any rate cuts by the Federal Reserve would tend to decrease net interest income to the bank. However, investment securities and funding portfolios are generally designed to mitigate this risk by creating an offsetting interest rate risk position. A portfolio of long duration investment and derivative strategies goes a long way to effectively hedge against adverse interest rate moves and preserve earnings.

MARSDEN: If the Fed were to cut rates substantially this year, I suspect that we would see an increase in M&A activity and capital projects, which would lead to more financing opportunities. Many of our customers and the sponsors we work with have been more cautious, given the cost of capital, so I believe that there is pent-up demand at the right interest rate. As asset-based lenders, we lend in all markets, and we are continually looking for new opportunities. That will not change if rates drop, though the priority will certainly be on loans with strong fundings and/or loans that deepen our relationship with our clients.

According to S&P Global Ratings, declines in deposits and funding cost pressures are some of the most pressing concerns and risks for banks right now. How is your organization addressing these issues?

HAZZARD: We’ve been focused on growing our balance sheet with customers who have an immediate need for an array of our products and services. We maintain a highly diversified, retail-oriented deposit base, and we believe our strong capital and liquidity metrics position us well for any changes in the regulatory environment.

JEANS: Competition for deposits has always been intense across all financial institutions. At Regions, we really focus on the relationship between our bankers and clients. We aren’t looking for quick deposits but are instead focused on serving our clients through any economic cycle. We believe we can do that because our style of banking is really centered on helping our current clients grow and welcoming new clients to the Regions
model of service.

PARSONNET: We have a sizable banking center network with stable and low-cost FDIC insured deposits. In addition, our HSA Bank division, one of the leading providers of HSA accounts, provides a source of longterm and low-cost deposits, which further strengthens our deposit base. We have also made some very strategic acquisitions, including interLINK in 2023 and, more recently, Ametros. Our investment in HSA, Ametros and interLINK shows that Webster continues to be strategic and innovative as we grow our best-in-class organization.

MARSDEN: There is no doubt that there is pressure coming on the cost of funding, with Basel III representing a good example of a potential challenge. Deposits play an important role in the process, so we certainly remain focused on expanding our deposits business. We are always seeking to deepen the relationship, so delivering both treasury and financing solutions is a priority and an important aspect of our returns. Besides being thoughtful about when we deploy our capital, we are always listening to our customers about our treasury services and continually evolving those services to meet their needs.

What is your outlook for the bank ABL space for the rest of 2024?

HAZZARD: Should the economy strengthen and rates decline as expected, we anticipate borrowing will rise as companies grow and M&A activity increases. If you look historically, M&A and sponsor activity has become a fairly significant portion of ABL activity these days, and there is pent-up demand within the private equity community to make acquisitions. As more acquisitions happen, we anticipate a greater need for financing, including asset-based facilities.

JEANS: We are optimistic about a pickup in M&A activity and lower rates in the second half of 2024. Additionally, ABL portfolio performance held within the normal historical migration ranges in 2023, and many lenders generally expect that trend to continue in 2024.

PARSONNET: It was gratifying to see how, after taking that pause for new business in mid-2023, our pipeline has exploded with a wide range of transactions and a variety of industries. As a national player in the ABL space, we naturally benefit from working with a diversity of industries, which has been one of the strengths of our business. While I think 2024 will remain challenging, particularly given some of the external forces that come into play and their potential impacts on consumer spending, I expect the ABL space will continue to carve its niche, as well as benefit from the opportunities from a stressed cash flow market.

MARSDEN: The ABL product continues to amaze me with its resilience and applicability, so I remain highly optimistic about the opportunities for this product. At the same time, I am expecting that the year may start a little slower. Our clients have been through a lot over the last few years between a pandemic, supply chain challenges, inflation and rising rates, but we are starting to see borrowing patterns normalize to be more consistent with the behavior that we experienced before the pandemic. This is happening because many of our clients were able to work through their inventory overhang and right-size their assets, putting them in a better position to make an acquisition or embark on a capital improvement project. This pent-up demand, and any reduction in rates, will only help that dynamic.•