At the fifth annual Education and Networking Conference sponsored by the New York Institute of Credit, Turnaround Management Association/Philadelphia chapter, the Commercial Finance Association/Philadelphia chapter and the ABF Journal, five ABL leaders offered their perspectives on post-recessionary lending and credit.
Participating on the panel, moderated by Blank Rome’s Paul Shur, were Richard Bochicchio, managing director, AloStar Business Credit; Robert Bushey, senior vice president, Sovereign Bank; John M. DePledge, senior vice president, TD Bank; Jeffrey K. Goldrich, president & CEO, North Mill Capital; and Michael J. Maiorino, Jr., executive vice president, People’s United Business Credit.
Each panelist was asked to provide an overview of the asset-based lending environment from the perspective of his respective business.
Bochicchio on early stage turnarounds:
- AloStar Business Credit serves middle-market companies, which have annual sales of $20 million to $300 million and borrowing needs from $5 million to $20 million.
- The kinds of companies we look at are going through transition, such as a high growth phase, acquisition or early stage turnaround (which we characterize as coming off a loss period but now coming back to profitability on a monthly basis). Things are getting better for companies we’re looking at. We consider deals that are a little tougher and a little off of the beaten path.
- AloStar has only been existence about a year, and in that time we’ve seen the number of players in our space increase significantly. What we thought was a wide open market that we had to ourselves now hosts a multitude of competitors aggressively coming to the market. However, some of the major banks are stepping back down.
Bushey on larger regional credit borrowers:
- Sovereign Business Capital’s asset-based lending professionals can leverage a company’s working and fixed assets to borrow funds of $5 million or more. We provide structured financing secured by accounts receivable, inventory, machinery and equipment and real estate. Sovereign Business Capital’s footprint includes New England, New York, New Jersey and the Mid-Atlantic.
- We’re a very well-capitalized bank, and our shareholders want us to put the capital to use. So, we have internal pressure from above coupled with small loan demand.
- Pricing started to come down in 2010, and cannot go much further, so the focus has shifted to structure. We’re trying to be very creative to generate deal flow. The ABL industry has the discipline to look at a situation to drive more credit to a customer. We compete on price and cross sell.
DePledge on large corporate borrowers:
- As part of the Specialty Lending Group, the TD Bank Asset Based Lending team provides financial solutions in the range of $15 million to $200 million, such as secured revolving lines of credit; equipment lines and term loans; leasing; letters of credit; owner-occupied commercial real estate mortgages and integrated cash management. In Q1/12, we closed $13 million in ABL loans compared to $30 million in Q1/11. There’s not enough volume for the amount of loan capacity that lenders have.
- Pricing has bottomed out now. Structures are getting nipped around the edges. You have to give up something on structure to get deals done. Last year, the ABL market did $101 million in the large space, and this year estimates are $55 million to $60 million. It’s a very competitive market out there in the large market space.
- Regulators in U.S. and Canada are policing institutions, and that impacts what we can do. We have a very strong balance sheet. We have a lot of money to use, but we use it prudently. Today, ABL can be used for many types of situations. When I started 30 years ago, it was almost considered a last resort, now we do a lot of large corporate lending.
Goldrich on small and emerging market borrowers:
- The market is getting more competitive for North Mill Capital, which makes loans from $200,000 to $10 million. There was a window when borrowers did not have many options when they went out looking for financing. Times have changed. We are now one of two to three proposal letters from competing asset-based lending and factoring companies.
- Most of our borrowers are in some stage of a turnaround, so either their balance sheets and/or profit and loss statements are weak and below the minimum standards set by banks. As a result, we do not usually compete with banks. Further to that point, in most cases we do not have financial covenants in our loan agreements that banks typically require.
- Pricing and structure for small borrowers that have the assets and ability to borrow on an asset-based arrangement have become increasingly competitive. We actively lend on assets other than accounts receivable ( i.e., inventory and equipment) to get borrowers more than sufficient availability. The market for companies that cannot obtain sufficient and, in some cases, any bank credit has improved for borrowers. There is an emergence of factoring and finance companies post-crisis that are aggressive, and there are legacy asset based lending companies who survived the crisis. This has created a competitive environment for non-bankable transactions. North Mill Capital has seen compromising on credit structure and pricing.
Maiorino on middle-market borrowers:
- Peoples United Bank (PUB) through its division, Peoples United Business Capital (PUBCAP), covers a market roughly from northern Virginia to Maine. We provide a full-service array of asset-based products, including working capital finance as well as term and mortgage financing to support fixed assets for manufacturer, wholesale and service concerns. Minimum transaction size would be $5 million. Demand has increased for financial services/lender finance — our view is selective and focused on opportunities with operators known to us and asset classes we are comfortable with.
- Credit standards are relaxing on larger deals in our range — stretch loans, covenant-lite and springing covenant deals have returned, along with aggressive advance rates against collateral, lack of guarantees. The second lien market is back, although this appears to be funded through investors as opposed to a hyperactive CLO market, and is more balanced than the 2006-2007 activity. Dodd-Frank will require more documentation and cause banks to add costs to keep up, but I don’t see credit restricting in ABL, as a senior secured well-monitored credit product. We may even be the beneficiary of C&I deals moving to an ABL environment for closer monitoring. This is true of the Basel III banks. The unregulated commercial finance sector should see little change. Regulatory environment in general — the pendulum has swung far to one side representing an over-correction to a degree.
- Middle-market borrower emphasis is a heavily competed-for battleground. Oversupply of funds — banks need sources of profitability now that reductions in loan loss reserves have waned. Average all-in new issue pricing declined almost every quarter since Q1/10. 2011 ABL market net increase may not have been as large, as overall economic growth has been slow. League table leaders have increased market share (on average 15%) by increasing their hold levels and completing refinancings early (2013 “wall of debt” pushed out to 2015-2016). The number of small cap commercial finance companies has increased — small middle-market distressed deal market has been vibrant. Availability of credit is strong — significant supply, less demand. Number of middle-market bank ABLs have increased (Rockland Trust, Berkshire Bank) to fill void left by banks moving up market — Wells Fargo, RBS Citizens, TD Bank.