Managing Director
Trimingham
In 1898, the Waldorf-Astoria Hotel was the afternoon watering hole of the rich and the famous. Located on Fifth Avenue at West 34th Street (today the site of the Empire State Building), the hotel’s main attraction was the chance to brush elbows with the likes of Charles Schwab, Gentleman Jim Corbett, Mark Twain, James Keene and Jim “Bet a Million” Gates, who earned his nickname by placing a $1 million bet on a game of baccarat one night at the hotel. (This may remind some readers of the $1 million “Liars Poker” bet made between Lewis Ranieri and John Gutfreund at Salomon Brothers in the late 1980s).
During the time of the Waldorf Crowd at the end of the 1890s, the defining characteristic of the U.S. economy was that it was awash with liquidity. The economy had shaken off the Panic of 1893. The bull market starting in 1898 led to unprecedented trading volumes on Wall Street. As America’s leading technology, the railroad drove speculation that swept across the U.S. economy and spread to other sectors like sugar, steel, elevators, glue and coal.
The American public viewed the wealth, showiness and seemingly instant fortunes of the Gilded Age with fascination and jealousy. Hetty Green, the whaling heiress, turned her $6 million inheritance into $100 million and was a legend. Roswell Pettigrew Flower, the governor of New York from 1892 to 1894, gained a reputation as a canny investor, and as a result of his strong reputation, possessed an extraordinary capability to influence market sentiment. In 1898, his aggressive moves on Brooklyn Rapid Transit drove the share price of the company from $6 to more than $135 by late 1899. His sudden death while fishing in May 1899 threatened the entire stock market until Morgan and other leading bankers stepped in with millions of dollars of capital to stabilize the market.
Now, as the stock markets have rebounded to dizzying heights with unprecedented levels of liquidity, many lenders are scratching their heads at the delta between Wall Street and Main Street. Amidst these seemingly vast pools of liquidity, what is the direction of travel for asset-based lending players?
Nate Land at BHC Funds in New York supports this view: “We see clients and prospects across C&I and real estate sectors seeking capital to prepare for the expected recovery in 2021. Companies have postponed growth investments and/or extended vendor terms for obvious reasons. They are eager now to compete on the front foot and/or to reward patient vendors, but this requires capital. ABL bank and non-bank lenders have sufficient liquidity on the sidelines waiting to deploy, but lenders can be selective. Deals are getting done.”
For many portfolio managers, government rescue capital programs like the Paycheck Protection Program and the Main Street Lending Program have provided vital sources of liquidity. The bad news for credit committees is it can be challenging to prudently determine how some companies will reboot as the impact of the programs fade.
Now, some credit committees are increasingly focused on the threat of rising interest rates in response to inflationary signs. Inflation is evident in many materials used in manufacturing, including chemicals, metals and cardboard. Some risk managers are becoming increasingly concerned about the market’s ability to absorb the enormous amount of government debt set to flood the market in 2021, particularly if inflation expectations are rising. Interest and fixed charge coverage covenants are much more manageable when Fed funds are at the historic lows we are now experiencing. What happens if Fed funds climb back to 5.25%, as was the case in January 2007, or 6.5%, as was the case in May 2000? (Some readers will remember Fed funds spiking at 19.85% in June 1981 to crush inflation.)
“Despite market disruptions due to the pandemic, 2020 proved to be a very active new business year,” Tony Vassallo, senior vice president of the Northeast region for Gibraltar Business Capital, says. “As we’ve moved into 2021, it appears that the Paycheck Protection Program is driving a decline in new business activity and funding requests. However, this program has also brought much needed stability to many of our borrowers in the form of permanent liquidity. The overall quality of our portfolio remains strong.”
As noted, the pandemic has forced borrowers to manage their working capital and cost structures ruthlessly in order to survive. One challenge facing middle market borrowers is how to increase their working capital as business returns to pre-COVID-19 levels. One vein of ore to mine for additional liquidity could be fixed assets for some companies.
In 2021, commercial real estate values are a tale of two cities. On the one hand, real estate values in supply chain crossroads like Easton, PA, and Reno, NV, are robust, as massive distribution centers spring up almost daily. On the other hand, real estate values in city centers like Portland, OR, are suffering.
The Paycheck Protection Program and Main Street Lending Program have been heaven-sent for many middle market borrowers. For those at the smaller end of the market, the second round of the PPP in 2021 has been a further boon. The question for some credit committees is whether these programs have been a bridge to nowhere for some borrowers. Will some borrowers stall mid-flight as they take off the runway?
“COVID, COVID, COVID! More of the same remoteness, hampered loan origination opportunities and a lack of relationship[s] has become a real issue for all ABL lenders. Clients almost don’t care who they are with unless it’s the cheapest deal with most availability, and oh by the way, ‘leave me alone’ with no or minimal reporting. All of the above sounds like the ABL world sucks — it does, but how exciting it has finally become. True survival of the fittest!”
