Michael Sharkey, President, Cole Taylor Business Capital
Michael Sharkey,
Cole Taylor Business Capital

ABFJ: In a news release announcing the completion of MB Financial’s acquisition of Taylor Capital Group, you said the merger would enable you to offer a broader array of competitively priced products and services. Can you talk about some of the new offerings?
I think the interesting thing is MB has a very strong retail presence in Chicago. They have over 90 branches, so the banks are liquid. They have a lot of capital so they bring a cheaper cost of funds to us, but in addition to that, they have a set of stronger capital markets products than we had at the old place. They’re stronger on the foreign side — foreign trade and international capabilities — so one of the keys to our business is to continually try and increase our average loan balance. And the larger companies are, the more sophisticated their systems and their needs are. So I think that by having some of these enhanced capabilities, we’ll be able to do a larger deal that drives profitability. It takes the same number of people to manage $5 million deals as it does $10 million or $15 million deals.

ABFJ: To what extent was MB Financial operating in the ABL space prior to the acquisition?
MB was about twice as big as Cole Taylor, but they had a small asset-based lending group that operated here in Chicago in the bank’s footprint. And it was populated by just a few people who used to work for us at LaSalle [Business Credit], so they’re good people. It’s a nice little portfolio, and we’ll just kind of fold it into what we’re doing here and go on.

ABFJ: If an ABL unit existed, how will MB Business Capital’s go-to-market strategy change or expand as a result?
We have a national ABL platform. We have offices in 10 cities across the United States, and that’s not going to change. MB has really embraced our national platform. They have other national businesses. They’re in the leasing business nationally. They’re in the currency exchange business nationally. So they’re familiar with national businesses, and they’re happy for us to continue on doing what we’re doing. And I think they’re very excited about having us. Since legal day one, we’ve taken 10 new deals through committee and gotten them approved in six or seven short weeks. We’ve already taken 10 deals to their loan committee without any issues or problems or changes or surprises of any kind. I’m on the loan committee; it’s kind of a mixture of Cole Taylor and MB people, but it’s working very well.

ABFJ: You note in ABF Journal’s November/December roundtable, “Refinancings and recaps are still very challenging when competing with regional banks that do them on a non-ABL commercial basis.” Can you elaborate?
The local and regional banks are chasing growth just like everybody else. They’re picking their spots to get aggressive. It tends to be on the better-quality deals, but we’re seeing these non-ABL groups of banks that are doing deals with no deposit, no appraisals on equipment, no field exam, no dominion of funds, a monthly borrowing base if any. It tends to be on the better-quality deals, which kind of skews our market into more of the story credits.

ABFJ: Is there a way you are addressing or handling the competition?
Our deals tend to be event-driven. The situations, whether private equity or entrepreneurial, tend to be high-growth, acquisitive or there have been some recent turnarounds. There’s normally an event taking place that causes the company to be looking for this type of financing. The fact is, a good ABL facility really is the best alternative for companies in those scenarios. So we try to impress upon them that we’re really financial engineers, and we’re not just lending them cheap money with not a lot of structure. We’re trying to be a creative partner who’s solving their need and who will be around to help them solve their need the next time around. We aren’t going to get too excited if there’s a bump in the road. So that’s really how you sell against that type of facility.

ABFJ: Do you have an example of when a deal has to “walk a fine line” on the credit side, and how do you price and structure to manage the risk?
I don’t really want to talk about pricing, but the best example of where stretching is going on is the SOFAs [Secured Over Formula Advance]. How big is the SOFA going to be? Over how many years is it going to be amortized? It was two years, now it’s three years. Now we’re seeing five years almost routinely. And if a deal goes bad, that’s where your loss is going to be — on those out-of-margin positions. The other places you can kind of walk the line: We’re seeing a lot on in-transit inventory, foreign assets and inventory advance rates. I think in general, you have to compete and walk that fine line, but you have to know where your soft spots are so if there are problems along the way, you can address those first, try to reel things back in those areas where you know you’ve been a little aggressive to get the deal done.

ABFJ: In a recent interview with ABF Journal, Maria Dikeos, director of analytics at Thomson Reuters, notes that one factor contributing to tight pricing in the ABL market is “the ABL lending community has not been able to get behind a concerted pricing correction the way the cash-flow market has.” Do you agree with this assertion? Why or why not?
It’s not surprising because we have different types of competitor alternative lenders in our space playing around, and sometimes it’s based on price, and sometimes it’s based on liquidity. But when you get the banks who are secured lenders — everything doesn’t have to be ABL — and when you get this kind of broad, gray area between what’s a commercial bank deal and what’s an asset-based lending deal, that obviously puts a lot of pressure on the pricing. And when you compound that with the fact that we seem to see a new asset-based lender or another bank announcing a new asset-based lending initiative almost every week, it’s no wonder that you don’t see any upward pressure on pricing at all. I think it’s gone about as low as it can go. I think if you look at any graphs that we’ve put together on gross revenues or spreads, you do see a dramatic drop-off over the last five years, but at some point there has to be a leveling off in that it just can’t go much lower.

ABFJ: Much has been written about how bank compliance and regulatory issues increase the complexity and cost of doing business. In what ways have these issues manifested in the industry and impacted organizations such as MB Business Capital?
I think the biggest issue we’re dealing with now is the recent Office of the Comptroller of the Currency’s Handbook on safety and soundness [of the federal banking system] that just came out on asset-based lending. We really need to see how it’s going to be interpreted and put into practice by the examiners. The CFA is formulating comments in terms of what our view of the OCC Handbook is and what issues we see with it, and what we’d like for them to consider. And I would encourage any of the member companies to participate in those discussions at the CFA because they’re very important. Nobody ever gets it right the first time. It remains to be seen how the examiners are going to interpret some of the things that are in there. But there are definitely some things that give us pause that we want to make sure we understand — at least have a voice in — by responding to some of the things that are in there.

ABFJ: Despite challenges, ABL seems to be gaining traction as a mainstream solution. Going forward, how do see the ABL product evolving in the market? What are the risks and opportunities?
I’ve been doing this since 1978. I always say we tend to do well in good times and bad for entirely different reasons. You have to have the fundamentals. You have to know how to do the blocking and tackling, what I call bare-knuckle ABL. There’s always going to be a fundamental need for our product. There are always going to be special situations, there are always going to be high-growth situations; there are always going to be situations that really lend themselves well to what we do — where we can lend money safely and help companies through whatever situation they’re experiencing. Having said that, ABL needs to be done right by experienced people. There does seem to be a rush in the market for this product by various institutions, and I think it remains to be seen if these new players will find the talent and have the discipline to lend into this market. You don’t want to be a me-too partner. You really have to know what you’re doing and have good discipline and expertise — from your sales staff through your field examiners, underwriters, credit people and workout partners. There’s a reason why so many companies have gotten in and out of this business. If you don’t do it right, you can lose a lot of money.

ABFJ: Where would you like MB Business Capital to be in five years, and how would you like the company to be perceived?
: We want to continue to build the same brand that we were building at Cole Taylor and even at Stan Chart and LaSalle before that. Our goal is to the best, most respected ABL lender in the industry with a reputation for professionalism and reliability. That really comes from understanding our customers’ needs and delivering solutions on a timely basis. At LaSalle and Stan Chart, we’d joke about how our mission was to be the largest asset-based lender in the country. And we kind of giggled. But we did it. We absolutely became one of the top four or five asset-based lenders in the country, so I don’t see any reason why we can’t do that again.

ABFJ: Can you share where you’re heading strategically?
MS: I think it’s remarkable where we have gotten to from a startup. Cole Taylor had no presence in asset-based lending. And right now, we have around a billion-and-a-half dollars in commitments. So we’re just going to keep building that reputation — that we close what we propose, and keep doing what we’re doing, and stick to the basics, try and grow our average loan outstandings. If you look at the bank’s strategic initiative, we’re in the box that says high return now and high potential for the future, so we just want to fulfill that expectation.

Jill Hoffman is editor of ABF Journal.