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Technology Finance -- Robust Demand to Continue in the Near Term

Date: Aug 04, 2015 @ 07:00 AM
Filed Under: Technology Finance

To gain a greater understanding of the current dynamics associated with technology finance, ABL Advisor spent some time with Tom Westdyk, group head and managing director of CIT Communications & Technology Finance.

ABL Advisor:  Considering today’s marketplace, what types of lending opportunities in the technology sector have you seen to be the most prevalent? Have these lending opportunities been used predominantly to pursue strategic acquisitions, fund new ventures or develop new products?

Tom Westdyk:  Most of the opportunities we are seeing today are centered on strategic acquisitions. Many software and technology companies today throw off so much free cash that we aren’t seeing debt being used to develop new products. That is usually embedded in the underlying capital structure, so we don’t see specific uses of proceeds for product development as today’s market is more M&A driven.

ABL Advisor:  Are there any specific applications by sector that you expect to be more prevalent in the next 12 months?

Photo of Tom Westdyk - Group Head & Managing Director - CIT Communications & Technology Finance

Westdyk:  I expect that we will continue to see more in healthcare IT and enterprise software than we will in financial services applications. The only other sector application we’re seeing more of is software for marketing services and web-driven advertising.

ABL Advisor:  Which loan structures would you say best suit the needs of borrowers in the technology sector, and why?

Westdyk:  Historically, we have seen a mix of loan structures and we expect this dynamic to continue. By this, I mean we have looked at some transactions with little to no cash flow, but because they are an ad network or a software type of business in which they process payments, they do generate large, high quality receivables. In those cases, the market has been able to structure several asset-based deals for companies in that phase of development.

At the same time, we are also seeing four-by-six unitranche cash-flow loans for companies that have the cash flow … so we’re seeing a mix of both. It really all depends on the company profile and where it is in terms of its evolution.

ABL Advisor:  Do you expect private equity investors to continue to play a significant role in this sector going forward?

Westdyk:  Absolutely. Obviously, we see the sponsors who traditionally have been focused on technology continuing to play a significant role. We also see larger funds showing interest in the technology sector as well. Overall, these funds aren’t solely focused on technology, but they are participating in many of these M&A financings.

ABL Advisor:  If you look back to 2014, would you say their interest in these deals from the funds and private equity firms has increased, pulled back or remained at the same level?

Westdyk:  The interest from these sources has stayed at about the same pace. At CIT, we are busier looking at small- to middle-market deals and in some cases, one-off transactions where we would serve as the sole lender. This is as compared to last year when much of the deal flow seemed to be larger, syndicated deals.

ABL Advisor:  What is your outlook for the technology sector in terms of lending opportunities for the next 24 months? Will such opportunities continue at the current pace, increase or decrease? Please explain why.

Westdyk:  We expect to see the robust demand we’ve been experiencing to continue yielding significant lending opportunities here in the U.S. Looking ahead, I think lending opportunities will grow at the current pace or slightly faster over the next couple years driven by the continuing adoption of the underlying technologies financed in both our technology and communication platforms. 

At CIT, we focus on the software side -- products that are embedded into the technology. While we finance some business-to-consumer deals, we primarily focus on business-to-business opportunities. It’s the software being used by a company that’s embedded into the company’s DNA … it’s sticky and becomes a part of the underlying operating system by which they run their company. In those cases, we expect the ongoing need to upgrade and maintain that software to persist since the software is so critical to the operation. Consequently the software as a service or licensing fee will also be there.

And while there will be competition that will require these software companies to grow, the embedded client base these companies have will result in -- at least in most cases -- a level of stability.

About Tom Westdyk:  Tom Westdyk is Group Head and Managing Director of CIT Communications & Technology Finance. In this role, he is responsible for the group’s leveraged finance origination and advisory efforts for all Communications, Information Services and Technology industry sectors. These sectors include cable television, wireline, wireless, communications towers, information technology, software, data centers and related industries.

From 1998 to 2003, Westdyk was the leader of the group’s syndications and structuring efforts, providing underwriting, senior debt sales and advisory services to various communications and media clients throughout North America for the group’s $1.5 billion portfolio.

From 1994 to 1998, Westdyk was a member of Toronto Dominion’s Communications and Media Group and was involved in the analysis, structuring, negotiation, credit approval and documentation of transactions in the wireline, wireless, cable and broadcasting industries, which totaled commitments of more than $3 billion.

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