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Special Assets: No Longer the Last Stop

Date: Jul 10, 2017 @ 07:00 AM
Filed Under: Industry Trends

Banking divisions formed to focus on troubled and stressed bank credits – known as Special Assets Groups (SAG) – are going through a seminal transformation not seen in a long time. In an effort to maintain and add scale, banks have realized that they gain more benefit from transferring manageable special assets rather than losing them. This change in strategy has made the already difficult and time-consuming job of managing special assets more tactile. Many mid-sized and regional banks have either started or acquired asset-based lending (ABL) and factoring businesses as a complement and yield enhancer for traditional C&I lending. One unintended, but ultimately positive side-affect has been to keep more companies within the same institution whereas in the past they would have surely been kicked-out.

This transformation started 5-to-10 years ago, but has accelerated at a rapid pace as more banks have had to be competitive in terms of product offerings and general market dynamics. The end result of ABL consolidation has created a new job for SAG, which is trying to keep companies rather than find a way to exit them. It’s the military equivalent of peace time versus war time and we are now in peace time. It’s a whole new mission to keep the peace than to go to proverbial war. The new goal for SAG is to transition assets rather than lose them. This means a very different approach than prior years, which involved using the well-known carrot to get the borrower to leave the bank before the impending (and more often than not inevitable) stick was needed to force them out.

Competitive market dynamics and combined synergies did not go over senior bank executives' heads once they found themselves trying to build or grow an ABL book. There are many reasons to explain today’s competitive marketplace and the slowness in certain areas of the market; but one clear explanation is transferring of an asset rather than exiting. This means there is less new product for lenders to compete over and more work for special assets executives.

It used to be just dealing with a company going through a credit change was a full-time job, but now Special Assets Groups are being forced to increase in size and in some cases are being formed for the first time. Certain banks never had the option of transferring until they got in the ABL business. Banks need assets, and to get assets it helps to have more products to offer clients. The proliferation of ABL consolidation and formation has significantly changed the competitive dynamics. Independent firms have felt the need to merge or get acquired to stay competitive, leaving opportunities for new entrants.

Consolidation, especially by banks, is a yield enhancer. It enables previously independent ABL firms to undercut their competition by lowering their cost of capital to literally nothing overnight. This competitive dynamic should not be taken for granted. Just in the past year or so, State Bank and Trust bought Alostar, UMB bought Marquette, Sterling bought Newstar and Ares bought First Capital, among others. All were able to operate under the same fixed-cost structure, but now with a lower cost of capital. Countless regional banks have formed ABL groups as part of becoming a strong regional player. The end result is that there is an all-out war going on to book and keep assets. What is the purpose of sending a company to special assets just to have your competitor book the deal? Transferring the asset rather than exiting the asset is the new cure for lender fatigue. In some cases, smaller institutions don’t even have a SAG division, and so they put this extra work on ABL professionals.

The confluence of these events is transforming SAG groups around the country. They are transitioning from a one-dimensional exiting group to a true work-out and transition group with the reserved right to exit when necessary. It now requires more tactile planning, greater knowledge of all divisions, and a buy-in or incentive to transition clients. This is certainly a big change from years past when options were limited and the end-result was to always exit the credit. Many of these professionals yearn for the opportunity to rehabilitate credits rather than lose them to their competition — who are all hungry for assets.

Super G has been on the forefront of this trend by helping fill in the gap when a company has to transition from a bank structure to a borrowing base, whether within or outside the incumbent lender. We have now seen first-hand many banks opting to transfer a company to another division (i.e. ABL or factoring) after a transitional stop in special assets rather than lose income. In either case, an airball was needed to be filled due to the transition to an active ABL borrowing base from a traditional bank structure. Whether helping to transfer or exit, our goal is always to provide a service to senior lenders to finance the risk that they choose to not finance. To that end, we provide three services to banks and ABLs to help all parties. These services can be grouped into three buckets: on-boarding – financing a bank to ABL short-fall; off-boarding – exit financing a client; and, retaining – providing an over-advance to keep a client within an institution.

Of course, there are still many times when companies need to exit. Luckily, a new crop of independent lenders is out there waiting for them. A void was clearly created by consolidation and general market dynamics, and firms like Stonegate, Northmill, Encina, Veritas, Siena and Far West have made significant progress in terms of building books of clients that could not seek bank-owned ABL financing, or else or preferred not to. Not every company deserves bank-owned ABL rates and there will always be a need for strong independents. This same trend happened a generation ago when companies like Heller and Foothill were acquired. We are clearly in another cycle that is driving competition to intense levels.

Never before have so many banks had the ability to keep assets. This is due to consolidation and true skilled lending professionals who understand how to deal with tougher credits. These professionals do the hard work in lending since only challenging assignments land on their desk. And they need to be up to the task. Special assets executives deserve more credit as they have been on the forefront of the changing banking strategies that have had a direct impact on recent competitive market dynamics. When is the last time a BDO said they had more prospects than they could handle? Thank your special assets department.

Charlie Perer
Head of Originations, Credit Committee Member | Super G Capital
Charlie Perer is Head of Originations at Super G Capital and a member of its Credit Committee. He is responsible for originating and structuring transactions across all loans products and corporate development initiatives. Prior to Super G, Perer co-founded Intermix Capital Partners, LLC, an investment and advisory firm focused on providing capital to small-to-medium sized businesses.

At Intermix, Perer spent significant time sourcing and executing transactions and building relationships within the branded consumer, specialty finance and business services industries. Prior to Intermix, he worked at Barker Capital, a media-focused merchant bank and senior debt fund that provides specialized investment banking services to underserved media companies. Perer began his career at Oppenheimer & Co. (acquired by CIBC World Markets) where he was a member of the Media Investment Banking Group.

Perer graduated from Tulane University with a Bachelor’s Degree in Management. He can be reached at charlie@supergcapital.com.
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