Asset-based activity off to a slow start in 2016, but should pick up in April
While middle-market ABL volume in 2015 was modest compared to 2014 throughout the country, we expect activity to pick up in 2016. Many borrowers had previously refinanced in largely generous credit markets, and general economic growth remained moderate. While most of the volume in 2015 was refinance driven, demand for fixed asset related loans continued to increase. This was partially due to some organic growth in the market, but also largely due to deferred capital expenditures. Buyout activity remained reasonably light throughout much of the year.
As we enter 2016, activity has remained somewhat quiet. Early in the year, companies tend to focus inwardly, finalizing financial audits, budgets, strategic plans, and performance reviews. As these activities wrap up in mid-March, activity tends to increase, and this year should be no exception.
Continued market development
- Not surprisingly, there has been a continued focus on the energy space. While both falling fixed asset values as well as end-user struggles have made providing term loans and working capital lines much more challenging, opportunities may exist in the right situations.
- The fall in other commodities has created both opportunities and obstacles for companies. We are seeing more scrap, recycling, and metals-related referrals than we’ve seen in some time. While some of them are highly challenging, others may be strong financing candidates.
- Evolving regulatory guidance related to leveraged lending continues to generate a significant amount of attention for lenders. It has slowed lenders in their response times on some opportunities while they try to determine if a loan truly is leveraged and how to proceed accordingly. It is also becoming clear that each lender is interpreting the leveraged lending guidelines slightly different, which has also brought additional uncertainty to the market.
Notable characteristics of the market
- As a result of adhering to the leveraged lending requirements and the increased caution dealing with companies in more challenged industries, competition for better quality credits continues to be intense.
- Margin compression has largely slowed since there is very little room left to move. Pricing in the middle-market has ranged from L+150-250, with outliers on either side depending on the credit profile. Depending on how lending institutions’ credit portfolios perform in the future, it would not be surprising to see margins trend up in the near term.
- Increased pressure from BDCs and non-regulated entities continues to be an ongoing challenge While this creates some difficulties in the short term, many of the more aggressive financing structures may be being provided at the peak of the market.
Despite continued competition from cash flow lenders, we have continued to have success in the middle-market asset-based space by focusing on the core advantages of an asset-based facility with new borrowers, including:
- Greater covenant flexibility
- Less focus on balance sheet leverage and debt to EBITDA multiples
- Oftentimes, higher advance rates depending on the situation
- For family-owned businesses, more flexibility with respect to personal guarantees
- Competitive pricing
Steve Bishop, Executive Vice President, Middle Market Loan Originations
Steve Bishop is the Head of Originations for the Middle Market Loan Originations team. He began his career with Wells Fargo in 1992 in the Associates Training Program and since that time has held various positions within Wells Fargo, from credit analyst and portfolio manager to business development officer, business development manager, and division manager. Prior to his current role, Bishop was a regional manager for Business Credit. He was also a principal in the bank’s Loan Syndications and Private Placements group. He received his M.B.A. in finance from the University of Minnesota’s Carlson School of Business after obtaining a bachelor’s degree from Northwestern University. He is a past president of the Minnesota/Upper Midwest chapter of the Turnaround Management Association and a member of the Association for Corporate Growth.