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Up in the Air

Date: Mar 30, 2020 @ 07:00 AM
Filed Under: Current Environment

George Clooney starred in the financial crises era movie, “Up in the Air,” that we in the commercial finance industry are all about to live through with one big exception. The asset-based lending (ABL) industry was the sector of commercial lending that was supposed to be the “George Clooney” sent in to provide liquidity and a wake-up call, or at least preserve collateral positions during a crisis. However, it’s going to be up to the commercial banks to unexpectedly crash the party and save the day rather than the bank and non-bank ABLs. The recent events surrounding the outbreak of the COVID-19 virus have unfolded so suddenly that the banks have no choice but to do battlefield surgery. This is truly emergency surgery on the front lines of commercial finance with no backup coming for a while.

This was not how any of us envisioned this happening. The ABL industry, both bank and non-bank lenders, spent the past five years waiting for a downturn to happen to show the banks that ABL – with frequent borrowing bases, field audits and cash dominion – is King. What the industry never expected was the tsunami that caused this immediate crisis, rather than an expected downturn that would have enabled a mass transfer of loans to ABL from C&I lending groups. It simply was not supposed to happen this way. The ABL industry dreamed of a recession, but instead got an immediate shutdown and corresponding depression that no one could have foreseen, especially not on a national, let alone global scale.

This all happened invisibly and literally overnight via a pandemic virus, rather than over a period of time. As the author writes this, the ABL market is frozen – meaning it’s very difficult to establish clear and reliable liquid NOLVs for any assets, and the market won’t unfreeze until business resumes. How can it?  Over the past few years, the ABL industry feasted on tougher credits while the banks grew. The banks grew by focusing on asset/loan growth at the expense of creating special assets and ignoring rising expense ratios. So, when the music finally stopped, they were driving far from home without a spare tire.

The result is that the banks are going to have to learn to operate, or at least try to operate, like ABLs as they are going to be the proverbial policeman who delivers a baby on the way to the hospital. Right now, banks don’t have time for ABL monitoring or special assets transfers – but this is happening on their watch. It’s semantics at this point to say we are in a pandemic. What we are in is a three-dimensional tragedy. Every ABL expected this, but what no one expected was a complete economic shutdown that would simultaneously freeze the economy and capital markets. Special assets groups certainly expected something, and they have been dreading this day as they were going to be placed on the front lines with minimal resources. Commercial banks were expecting the benefit of time to transition staff to the workout areas of the bank, but that time never materialized.

So, where does this leave us all? In a terrible position. The banks are put in the worst possible position at the worst possible time. All ABLs are busy with frozen collateral and there are far fewer special asset professionals around to help. The banks, similar to ABLs, had a plan in place to transfer staff to special asset groups over a period of months, not days or weeks. The ABLs were meant to have a head start to staff up in order to transition assets as evidenced by many banks forming middle-market ABL groups with the intention of dedicating resources to focus on commercial bank transfers. Similar to hospitals, they were built for sick people rather than entire cities. You cannot transfer an entire a bank portfolio to a small group of workout professionals any more than a hospital can treat an entire city.

This means many ABLs are already in an over-advance position with the worst yet to come, and that is just the bank ABLs. Non-bank ABLs are typically leveraged 4x to start and now have illiquid portfolios. The ABL market is going to be stuck and at the mercy of the government, which will be the new primary source of repayment via SBA loans and Treasury-infused capital markets liquidity. In several instances, traditional collateral (AR & Inventory, etc.) is going to become the secondary source of repayment rather than primary, that is until the market unfreezes. Everyone’s collateral is frozen, literally. Companies are hoarding cash due to the virus and no one can access collateral. ABLs are going to need to fund payrolls and protective advances to get to the point where business can resume and collateral can de-frost, but at what cost?

The ABL industry is firmly on the defensive rather than the big offensive movement to transfer assets from banks that they expected. The ABL industry grew tremendously in a market boom and, like most industries, never considered the business case of a global shutdown and lockdown of certain U.S. cities — how could they? And this time, the banks and non-banks are not going to get bailed out as there is no incentive for banks to ask for a bailout – just look at the airline industry right now. So, it’s every lender for themselves. This is going to impact main street hard, so brace yourself. Most medium-size businesses turn to their bank in their time of need, which is usually situation-specific not a global catastrophe in nature. ABLs are simply not going to throw good money after bad that’s for sure, but they will be able to save some.

Movies are always better than reality, but this is the reality of our livelihoods and that of our clients. The author has no bold predictions at this point and hopes to make this the first of posts about his collective feedback gathered from professionals in the market. Real suffering is starting to take hold, so we can only hope that there will be some business success stories where lenders came together to save lives and jobs. If we can all just get back Up in the Air.

The author appreciates feedback and he can be reached at his email below.

Charlie Perer
Co-Founder, Head of Originations | SG Credit Partners
Charlie Perer is the Co-Founder and Head of Originations of SG Credit Partners, Inc. (SGCP). In 2018, Perer and Marc Cole led the spin out of Super G Capital’s cash flow, technology, and special situations division to form SGCP.

Perer joined Super G Capital, LLC (Super G) in 2014 to start the cash flow lending division. While there, he established Super G as a market leader in lower middle-market second lien, built a deal team from ground up with national reach and generated approximately $250 million in originations.

Prior to Super G, he 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. Perer began his career at Oppenheimer & Co. (acquired by CIBC World Markets) where he was a member of the Media Investment Banking Group. He graduated Cum Laude from Tulane University.

He can be reached at
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