Asset-Based Market Update June 2016

Wells Fargo is the #1 asset-based bookrunner through Q1 2016

As the #1 bookrunner for asset-based loans in the first quarter with 24% market share, Wells Fargo kicked off 2016 with impressive momentum despite overall market softness. Total volume of $16.5 billion for the asset-based market in 1Q represented a 32% drop from 4Q and an 18% decrease from the comparable quarter for 2015. This was driven by a number of factors, including a meaningful drop in refinancing activity, syndication of fewer deals over $1 billion (or “jumbo” transactions), and unfavorable market conditions for leveraged loans and high yield bonds through mid-March. On the flip side, there was an uptick in DIP activity in 1Q, with names like Sports Authority, Hancock Fabrics and paper company Verso/NewPage filing for bankruptcy.

The drop in volume for 1Q is expected to be somewhat of an anomaly, with 2Q bouncing back well above $20 billion (assuming two or three jumbo transactions hit their late-June anticipated closing dates). Wells Fargo remains very active again this quarter, closing an $850 million asset-based facility for Michaels Stores and winning mandates for the Verso exit financing and the LBO of Maxim Crane Works and AmQuip Crane Rental by Apollo Global Management, LLC. Recent market transactions include two jumbo issuers new to the asset-based market (one in the steel sector, the other in food and beverage), helping to prop up the asset-based market portfolio.

Asset-based pricing remains heavily in issuers favor, with an average drawn spread of L+184 for 1Q. However, while average pricing has remained relatively flat for several quarters, we’ve witnessed an increase in the number of transactions pricing below L+150. Undrawn pricing also remains in a tight band, averaging 32 to 36 bps over the last several quarters. The downside to these pricing levels is a thinner market for retail syndication. The vast majority of domestic banks are extremely focused on relationship returns, which results in a requirement for additional ancillary income when the yield on the asset-based loan tightens. Unfunded deals, challenged credits and issuers with limited ancillary bank product or capital markets business to spread around are feeling the brunt of the pain from bank’s discipline around returns.

Pricing-frequency-table

The outlook for the second half is similar to what we’ve experienced in 2Q, with the asset-based market presenting an issuer-friendly technical picture through 2016. Although the regulatory environment continues to impact bank appetite for leveraged lending, asset-based lenders are anxious to deploy cash into credits with meaningful relationship connections. Strong conditions in the institutional loan and high yield markets provide even more potential upside for ABL in the second half.

* Source: Thomson Reuters and Wells Fargo Capital Finance as of June 15, 2016