GE Capital, Corporate Finance: Adding Stability and Domain Expertise to the Mix
Bob McCarrick

The way Bob McCarrick sees it, the asset-based lending product is more readily accepted today among borrowers from all sectors.

ABL Advisor:  By what measure does GE Capital, Corporate Finance define middle-market asset-based lending transactions and/or relationships?

Bob McCarrick:  From a GE Capital perspective, we define the middle market by revenue size starting at $10 million up to $1 billion in annual revenues. There are roughly 200,000 businesses in this category and those companies employ more than 40 million people. The middle market accounts for about one-third of the total U.S. GDP and by itself would be as large as the fourth largest economy in the world. Our cash-flow business fits squarely into these revenue targets; but on the asset-based side of the business, we include some larger revenue companies. If we look at it from a facility size standpoint, we start at a $25 million ABL facility size and we go up to deals that are $2 billion in facility size or greater.

ABL Advisor:  What are most middle-market borrowers looking for these days from their ABL relationship? How do these needs differ from the days prior to the last recession?

McCarrick:  In the days prior to the recession, I think borrowers were looking for the most aggressive terms … they were seeking the most flexibility, the highest availability and the lowest price. They were engaged in the growth game. Since the recession, we find borrowers are seeking true relationship lenders – lenders who understand their business and who will work with them through the downturns and cycles within their industries.  We deliver on this across GE Capital by aligning vertically by industry.  GE Capital has dedicated businesses built around healthcare, media and telecom, for example, and within my business –- Corporate Finance --  we have built industry teams around energy; food, beverage and agriculture; metals and mining; retail; timber and forestry, and so forth. Borrowers really appreciate lenders who have domain in their respective industries. Pre-recession it was largely about terms and post-recession, it’s more about stability and the confidence that their lender understands their business.

ABL Advisor:  What other things come to mind with regard to areas that borrowers are paying close attention to these days?

McCarrick:  I think the recent crisis in Washington has affected middle-market companies to a much greater extent than perhaps the large corporates. This latest crisis, for which we have reached only a short-term solution, affects middle-market borrowers beyond their revenue stream and profitability. It impacts these companies in terms of their desire and willingness to want to do the things they need to do to expand.

ABL Advisor:  Much is said these days about the way asset-based lending structures are used in various ways to achieve a desired outcome. What is your take on that? In short, can you speak to the flexibility of ABL structures?

McCarrick:  As you know, asset-based loans typically have been used for higher-volume lower-margin type businesses. So any borrower who has that type of revenue and margin profile will generally lean more toward an asset-based structure versus a cash flow loan. But I think we continue to see a better acceptance of the ABL product as time goes on. During the crisis, some borrowers who had historically borrowed on a cash-flow basis moved to an asset-based loan because of declines in their overall businesses. Some of these businesses have cycled back, but the borrower has retained the ABL product because they like it. They like its flexibility from a covenant perspective and from a pricing standpoint. As a borrower, once you understand your borrowing availability formula, you understand it follows the flow of your business. Also, there’s a much deeper market for ABL revolver exposure than there is for cash flow revolver exposure.

We are also seeing more bifurcated term loan structures today with companies in a cyclical industries. These companies may have decent cash flow today, but in looking ahead, recognize that if the business cycles down, traditional banks may not want to be in that structure. What we and others have done is to create a cash flow term loan with a certain collateral package with an ABL revolver that’s secured by current assets. The ABL revolver is held by the bank and the cash flow term loan is held by the institutional market that plays in the higher yield and cash flow space. We’ve been in a good many of these deals, particularly in the foundry space.

But I think ABL is a more readily adopted product today than it has been in the past because borrowers recognize the value of having the flexibility inherent in ABL structures.

ABL Advisor:  Can you give us your take on today’s syndicated loan market?

McCarrick:  In general, we saw a pullback post crisis but today we see a very robust ABL market. All of the banks participate and you still have commercial finance companies like GE Capital that are big players in the loan market. The biggest issue in the syndication market is that we haven’t seen as much new money as we’d like to see. There’s a lot of recycling of cash these days and from a borrower’s perspective, it’s great in terms of pricing. But in general, I think the market would like to see more new-transaction opportunities.

One thing about the ABL market is that there are limits to its depth. Once you get above $2 billion in asset-based exposure, you then have to turn to a different area of the marketplace, which is priced higher than what you would see in the traditional ABL revolver market even though the assets are the same.

ABL Advisor:  What is your outlook with regard to borrowers relying on asset-based lending structures to meet their financing needs in the coming year?

McCarrick:  I expect that we will see increased activity across the board both in asset-based lending and cash-flow structures. I’m hoping we’ll continue to see an improvement in the GDP and other economic factors here in the U.S. I am concerned that we will have another stalemate in Washington in the first quarter and that borrowers will hit the pause button until a long-term solution is put in place. But I do believe that once we see economic activity increase, you’ll see more confidence emanating from the middle-market. They are going to look to grow, they will start to invest and we will see more merger and acquisition related activity. All of this will drive more new money in the lending markets.

From our perspective, ABL has always been a core product and we’ve been a long-term player in the space. We bring more than just a lending relationship … we bring domain expertise and we will continue to grow both in the cash-flow and asset-based market.