What will drive middle market ABL activity in 2015?

Middle market asset-based lending update

Middle market ABL volume in 2014 was quite robust throughout the country, especially in the second half of the year, as deal count and dollars funded easily surpassed that of 2013. While most of the volume remained refinance and growth driven, demand for fixed asset-related loans increased materially over prior years. This was partially due to organic growth in the market, but also largely due to deferred capital expenditures, as many companies had held off on making major expenditures through much of the economic downturn. Buyout activity remained fairly light throughout much of the year.

As we enter 2015, activity has decreased noticeably, as is often does the first two months of the year when companies tend to focus inwardly, finalizing financial audits, budgets, strategic plans, performance reviews and the like. As these activities wrap up in mid-March, activity tends to increase, and this year is certainly no exception. Some of the recent developments in the market are as follows:

  • There has been a marked focus on the energy space. Given the substantial drop in oil prices recently, this is, not surprisingly, generating renewed interest in making sure companies have a sound game plan for how to manage through these challenges. From a lender’s perspective, this has created new challenges, but could also provide some additional opportunities.
  • New regulatory guidance related to leveraged lending continues to generate a significant amount of attention for lenders. As the guidance continues to evolve, depending on how the how things play out, this could actually create new opportunities within the middle-market ABL space, due to the general focus on underlying asset values vs. lending a multiple of cash flow, but this is far from certain at this point. It may also create additional opportunities for non-bank/non-regulated financial institutions.

Other general comments on the current market include:

  • Potentially as a result of the expected leverage lending requirements, competition for better quality credits has further intensified. This competitive landscape is also most likely related to the fact that the balance sheets at most institutions remain clean.
  • After showing signs of slowing, margin compression has continued, although there is very little room for this to go any further. Pricing in the middle-market space has ranged from L+150-250, with outliers on either side depending on the credit profile.
  • Requests for term components have continued to be higher than in prior years.

Despite continued competition from cash flow lenders, we have continued to have success with new borrowers in the middle-market asset-based space by focusing on the core advantages of an asset-based facility – greater covenant flexibility, competitive pricing, less focus on balance sheet leverage and Debt/EBITDA levels, higher advance rates depending on the situation, and for family-owned businesses, more flexibility with respect to personal guarantees.