Managing Director
Trimingham Inc
The SPAC Bubble
SPAC deals have emerged as alternatives to traditional initial public offerings for startups in part because companies merging with SPACs can make business projections that wouldn’t be allowed in IPOs. SPACs have raised a record of approximately $140 billion this year, according to Dealogic. Issuance slowed this summer but rose to about $10 billion in October, the highest level since March’s record total of roughly $36 billion. As of writing, there were 329 new SPACs so far this year, up from 248 in 2020 and 59 in 2019.
Adding fuel to the fire, there are an estimated 7,000 private equity firms in the United States, according to data from Prequin, many of which are using SPACs to create liquidity events for their portfolio companies.
“2021 was a challenging year for our industry. Because of the overall slowing down of the economy, we saw banks hold onto loans that limited deal flow. Like a domino effect, lenders dropped prices to secure business and became creative to gain partners,” Jennifer Palmer, CEO of Gerber Finance, says. “We know as an industry we are very resilient and resourceful when it comes to finding new ways to achieve growth. At Gerber, in addition to supporting all our partners at this challenging time, we leaned into our natural products and food business, which is growing exponentially. As a woman-run company, we attract numerous women-owned companies seeking a partner who understands these owners’ obstacles and opportunities.
“Everyone thought after 2020 we would have a recovery in 2021,” Michael Haddad, president of capital finance at Sterling National Bank, says. “We didn’t — 2021 was a “delta” — variant that is. We came to a big bump. Lenders responded by doing deals they wouldn’t do in normal times.”
Supply (Chain) Disruption
“2021 was a year of pandemic recovery, with companies recalibrating to the rebounding new world,” Lori Potter, managing director of originations at Great Rock Capital, says. “Some negative impact to the economy was reduced due to the abundance of government programs that masked quite a bit of ‘core’ corporate stress, as well as commercial banks continuing to be flexible and patient with their borrowers. As these programs expire and banks tighten up from a risk management perspective, liquidity from alternative lenders will likely be in high demand throughout 2022. Companies with less leverage, supportive owners, contingency plans, solid market share, a reason to exist and risk awareness will be successful; 2022 will be about survival of the fittest.”
“There is currently a major labor shortage at every level in the economy. This prevents things from returning to ‘normal,’ challenges how leanly businesses can operate without compromising service or quality and makes the prospect of a more robust supply chain look increasingly grim,” Meredith Carter, president and CEO of Context Business Lending, says. “I think the biggest challenges facing businesses in 2022 will be attracting and retaining a skilled workforce.”
“The elephant in the room is inflation,” George Psomas, managing director of BHC Funds, says. “Most investors, lenders, bankers and advisors have not operated in an inflationary environment that hasn’t been seen [since] the 1970s. For most, up until recently, it was just a history lesson discussed at business school; now it’s real.”
“We have seen a bounce-back of ABL opportunities which began in late 2020,” Jeremy Harrison, who is based in London and Amsterdam and is head of sales and origination at ABN AMRO Commercial Finance, says. “We are seeing growth in all areas we cover, from mid-market to corporate, including a mixture of M&A and refinancings. M&A remains buoyant, and I believe this is a growing area asset-based lenders now feature more as an option to companies and their advisors. This is, in part, due to advisors obtaining collateral due diligence at an early stage, meaning the challenges of the due diligence required is becoming less of a contention. We have also seen leverage or cash flow structures convert to ABL, thus being more flexible and covenant lite. This is something we have been predicting for a number of years. ESG and sustainability are also a core requirement from both clients and advisors, and this has been a trend that has gained momentum over the last couple of years.”
The COVID-19 pandemic has brought the biggest disruption to the container shipping industry since its inception some 65 years ago. Under normal circumstances, a container will go from a factory in Shanghai to Chicago in 35 days. Now it takes up to 78 days and then the same container often returns empty.
“For many restructuring professionals, 2021 has been slower than they anticipated,” Frederick Hyman of Crowell & Moring, says. “Continued monetary and other support from the federal government, together with seemingly unending liquidity from private lenders and a further decline in interest rates, have hidden many problem areas in the leveraged markets. Additionally, many lenders have been hesitant to exercise remedies or otherwise take actions that might lead to a borrower’s bankruptcy during a period when their collateral may be valued at its low point. The general economic recovery in 2022 may ironically correspond with an uptick in restructuring work as governmental support programs cease, inflation and supply chain problems continue and lenders begin to explore their options with respect to those borrowers whose business[es] will not recover.”
“While 2021 was extremely difficult, I remain optimistic about our industry’s future,” Palmer says. “We are a resilient and resourceful industry and need to continue to shift how we do business, not just to adapt, but [to] thrive in 2022.”
“U.S. retail consumers are said to [be] in the best financial shape of the last 40 to 50 years in terms of their fixed obligation ratios,” Carter says. “As a result, Context expects that e-commerce will continue to skyrocket in 2022. This will create a great opportunity for lenders to provide working capital to e-commerce companies to meet consumer demand and, in some cases, provide growth capital needed [to] repatriate manufacturing to overcome overseas supply chain issues.”
On a final sobering note, some lenders see some clouds on the horizon, including:
- Heightened fraud risk as Paycheck Protection Program loans face the inflection point of maturing or converting into equity
- Intensification of economic and political friction between the United States and China
- Uncertainty about when the banking regulatory environment will “return to normal”
- Weakened “loan workout bench strength” as the baby boomer generation of workout lenders and professionals retire
“As Johnny Cash sang, ‘the train is coming.’ In this case, the train is loaded with a ton of bad loans that will default in 2022 and 2023,” Haddad says. “The sunny side of this street while this train is passing by will be growth for non-regulated lenders as banks have to ‘take their medicine’ for being aggressive.”
Hugh Larratt-Smith is a managing director of Trimingham and a regular contributor to ABF Journal.
