Asset-Based Lending & The Great Recession Winston Rowe & Associates

The last three years of financial crisis and recession have brought a host of new economic-business situations. Not since the Great Depression, many say, has the precipice of a global financial collapse seemed so near.

Asset Based Lenders:

Yet, even as the flow of capital from a broad spectrum of lenders slowed to a trickle during the financial crisis and subsequent global economic pain, asset-based lending (ABL) remained a viable form of corporate finance. While some large financial institutions virtually stopped lending in the face of uncertain earnings and many regional banks labored under the weight of defaulting real estate loans, struggling businesses turned to asset-based lenders to help restructure their costs and stabilize earnings. Other lending vehicles tend to ebb and flow, following economic peaks and valleys, but ABL can be adapted to changes in the marketplace, whether resulting from economic conditions, new legislation, or the emergence of new industries.

In the mid to late 1980s, investors recognized inefficiencies in the market, finding that many corporate balance sheets undervalued their assets and were greatly underleveraged for financing purposes. Such investors initiated a leveraged buyout tsunami by focusing on undervalued corporate balance sheet assets and creating huge investor demand for high-yield bonds to finance large corporate buyouts. Using the same techniques, middle market investors convinced asset-based lenders to provide senior and junior liens to facilitate such acquisitions.

Retail financing was the next new market growth area for asset-based lenders in the 1980s and 1990s. Retailers’ suppliers manufactured consumer goods with the financial support of factors, which typically required a retailer to have unsecured bank debt from a commercial bank. At that time, retailers were experiencing erratic sales and pressure on profits, and many also carried high debt from aggressive lenders supporting past mergers, acquisitions, and internal expansion. Many of these retailers became distressed and went into default with their unsecured lenders, requiring additional funds to survive.

In the 1990s, further expansion in ABL occurred in Canada, where “A banks” were dominant and there were no lenders of last resort, aside from the factoring of accounts receivable. Canadian banks could quickly call a loan and go into straight liquidation since these markets were found to be much more lender-friendly in the courts. Although the concept of ABL to distressed businesses was nonexistent at the time, a few U.S. lenders began to introduce ABL in Canada and made a strong commitment to that market. Later, other lenders followed.

The Great Recession:

ABL emerged as the dominant vehicle for lending during the most recent recession because of the disappearance of other lending vehicles. The cost of funds and credit problems hurt non-bank lenders, such as commercial finance companies, collateralized loan obligations, and hedge funds, and drove many well-known finance companies out of business. To offset the higher cost of funds, a few lenders focused on cash-flow lending to obtain the higher interest rates and fees associated with acquisition financing. Once the cash-flow window dried up, however, ABL became the only viable alternative.

Traditional commercial bank lenders, who thrive on profitable businesses with reasonable leverage, saw their borrowers incur losses that resulted in unacceptably high leverage. Many of these commercial banks also had real estate problems in their portfolios and were forced to curtail other lending activities. Asset-based lenders with strong balance sheets grew during the recession by refinancing these leveraged orphans of commercial banks.

The Recovery:

Many businesses lost a significant percentage of their sales in 2008 and 2009 yet were able to survive by reducing their operating costs, usually achieving their largest savings by reducing labor costs. They also shifted their focus on market replacement and drove down their production levels to more probable levels of demand and revenue.

When sales rebounded in 2010, these businesses immediately experienced increased profitability. Asset-based lenders helped many recovering, highly leveraged businesses to leave their existing disgruntled lenders and provided them with fresh starts. These businesses had good financial outlooks as a result of a few months of positive earnings, stronger sales backlogs, and quantifiable labor and other cost savings. Asset-based lenders booked many loans in 2010 to these recovering businesses.

At the end of 2010, many private-equity firms anticipated capital gains tax increases in 2011. Faced with fewer, if any, exit strategies, investors owning strong private companies with ample excess availability took large distributions financed by asset-based lenders. This benefited lenders by increasing loan utilization by good borrowers, after they had earlier experienced record low levels of utilization as a percentage of the total line of credit.

Many asset-based financings in 2011 involved businesses like capital goods manufactures that had lagged other companies that had benefited from the improved economy of 2010. During the recession, many businesses had delayed capital expenditures to conserve cash and because they had downsized to much lower capacity levels. But special tax breaks that permitted 100 percent depreciation of capital expenditures made in 2011 spurred demand among many businesses that had delayed such purchases earlier. ABL was used not only to finance purchases of many of those capital goods, but also to finance the companies that manufactured them.

Historically Adaptable:

As demonstrated by its track record during wildly diverse markets over the past 30 years, ABL historically has adapted to changing times and economic conditions. A borrower who is unhappy with its current lender may want to test the market in today’s environment. A business that has a quantifiable story, a strong management team, and improving cash-flow trends should find willing asset-based lenders whose criteria cover a wide spectrum of industry specialties, credit parameters, and levels of risk to provide financing, along with relationship managers/loan officers to offer business advice in good times and bad.

If you would like to learn more about lending options for your business from Winston Rowe & Associates you can check them out online at http://www.winstonrowe.com

They have some of the most aggressive rates and terms available, while managing every step of the financing through their advisory and due diligence processes from document collection to commitment negotiation and closing.