The effect of COVID-19 on the asset-based lending market became apparent in the second quarter as the industry’s most recent data reflect a 24.1% decline in total bank loans and 29.4% drop quarter over quarter in non-bank lending, according to the Secured Finance Network (SFNet).

“This quarter will go down in the record books as perhaps the most volatile quarter witnessed since we’ve collected statistics,” the SFNet data analysis said.

Second quarter bank loans totaled $92 billion. Hardest hit was the retail industry vertical, which historically relies upon secured finance. COVID-19 was disruptive to most retailers; several accessed the ABL market in Q2 to obtain “covenant lite” financing, issued with fewer restrictions on the borrower and fewer protections for the lender. New commitments at $6.7 billion reflect higher levels of “fallen angel” activity.

In the bank market, utilization declined from 51.6% in the prior quarter to 38.3%, the lowest level since that statistic was first collected, more than 4.5 years ago. The loan run-off reflects only modest new loan commitments at $6.7 billion, lower economic activity, a robust capital market’s issuance, and repayment of “defensive” revolver draws that occurred at the outset of the pandemic.

In the first quarter, new loan commitments were $237.8 billion.

Richard D. Gumbrecht, the SFNet CEO said, “If utilization data remain at these levels, we will be carefully watching market activity during the back-half of 2020 relative to new business originations.”  Utilization refers to loans outstanding as a percentage of total commitments.

New non-bank commitments were recorded as $124.6 million for the second quarter, down sharply compared to the past six quarters and compared to $207.8 million in the first quarter.

Levels of non-accruing loans for bank lenders reached $616 million, a 47% increase over Q2/19 and the highest level noted since this metric was tracked in 2016. However, gross write-offs measured $55.6 million in Q2/20. This was an increase over Q1/20 but in line with the levels last seen in 2016 of approximately $57 million.

SFNet also reported the results of its quarterly confidence index survey, which solicited responses from senior executives from April through July regarding their views on anticipated activity or conditions in the upcoming three-month period.

Even in the face of a recessionary economy, record low utilization levels, and deteriorating portfolio quality all stemming from the COVID-19 pandemic, the bank market and non-bank market participants seem to feel considerably better about their prospects at the end of Q2 versus the end of Q1. On a combined basis, nine of the 10 confidence indicators increased in Q2 for the bank and non-bank participants.

On the positive side, SFNet noted the following developments during the second quarter:

  • While risk ratings and non-accruals migrated, the industry did not experience significant loan losses. The ABL product stood the test and endured as expected.
  • The Confidence Index has improved in Q2, reflecting the fact that lenders are optimistic about the future prospects for business conditions and their lending opportunities.