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Piranhas Aside, True ABL Shops are Maintaining Discipline

Date: Jul 06, 2016 @ 07:00 AM
Filed Under: Industry Trends

ABL Advisor spends some time with MB Business Capital Group President Bruce Sprenger who shares his view on the dynamics of what he deems to be a hypercompetitive "piranha" environment as well as his observations on the sentiment among borrowers in today’s business climate. Whatever the current dynamics and borrower sentiment might be, Sprenger asserts the following: Bank ABLs can still offer the best economics and a full-service product approach to meet borrowers’ needs.

ABL Advisor:  As we approach the mid-year point, how would you characterize asset-based lending activity in the first half of 2016? To the extent possible, please share you direct experience at MB Business Capital?

Bruce Sprenger:  I would say generally the market demand remains robust and it has been met with continued fierce competition on all fronts. Banks, BDCs, and new entrant ABL non-banks with plenty of capital access have all created a piranha environment. Bank platforms can still offer the best economics and a full-service product approach to meet the needs of our clients. At MB, our new business activity to date is ahead of same time last year as a function of both number of deals closed and the average size of those deals.

ABL Advisor:  When we spoke with you in 2014, one concern you expressed was a lack of discipline among ABL players? Has this behavior continued?

Photo of Bruce A. Sprenger - Group President - MB Business Capital

Sprenger:  I recall that commentary and at that time, I was calling for our industry to act prudently in light of the hypercompetitive environment industry wide. With markets being as efficient as they are, they provide opportunity to all levels of risk appetite and the management of that risk. I do feel that the true ABL shops have sustained taking prudent risks. I can’t say that always applies to players from other types of platforms, but that’s all in the eye of the beholder.

Let’s be honest, if you have capital to deploy and your LPs and investors expect their return, you may have only so many choices to get the growth demanded by your platform. We have always used our deep skills and experience of our team to craft solutions that we feel are prudent ABL plays coupled with a rigorous ongoing credit review of our portfolio. We view our efforts as a marathon and not a sprint. We feel fortunate that our organization’s leadership accepts that strategy and it has served us well through this last cycle and similar ones in the past.

ABL Advisor:  How are alternative lenders -- such as BDCs and hedge fund, alternative structures such as unitranche debt and cash-flow lenders targeting smaller deals -- impacting opportunities for asset-based lenders in today’s marketplace?

Sprenger:  There is no question that these players have created a new competitive dimension in the market. Some have started de-novo and others through acquisition of a platform to a rollup strategy. We are comfortable competing with these lenders and often partner with them to provide the back room control and discipline they cannot offer. It is a compelling argument to offer a one-stop solution to the capital stack and some users think this solution lessens execution risk. We have minimized that execution risk by also having a robust stable of “key partners” that we bring to the table in a similar fashion as a unitranche approach … that has been very successful. We are enjoying new market opportunities from cash-flow deals that did not perform as planned. This is where we focus our attention in that sphere of the market.

ABL Advisor:  The U.S. economy has been in an expansion mode since the second half of 2009, albeit incremental. Are you detecting any signs of an impending down cycle on the horizon?

Sprenger:  Economists are akin to weather forecasters. They still get paid even if they are not totally accurate. Economic barometers and claims of the current economic expansion in my view are mixed. We call on hundreds of middle-market companies every month. We observe very, very careful and thoughtful thinking on the part of business owners with regard to investing in capital for growth; whether it is in new plant and equipment or working capital. We have noticed that our existing clients’ need for term financing is not as robust as before the last trough of the 2008 to 2010 cycle. In fact, it may contract in many segments. That tells me they are concerned not only for a possible downward change in the cycle, but they are also guarding against future fiscal tax policy and government regulation that might impact their businesses. There is still in my view, a lot of uncertainty in the business community.

Setting all of that aside, asset-based lenders do well in periods of change; bear or bull. I don’t think that will ever change as we are not subject to emotional responses to the economy. We value margin and lend based on collateral, not emotion.

ABL Advisor:  What are your expectations for the remainder of the year in terms of demand for ABL structures in the markets MB Capital serves? Will activity heat up as the year draws to a close as we’ve seen in other years?

Sprenger:  We are bullish on the prospects for our business. We have a systematic strategy to expand our sales funnel and have done so this year by adding new offices with more to come, and will continue to be optimistic for the future … we continue to build for that future.

ABL Advisor:  On an entirely different note, what measures is MB Business Capital taking to develop ABL sales talent?

Sprenger:  At MB, talent management is a key to our success and the sustainability of our business. We have a history as a team and a core belief that we are entrusted by our stakeholders with the opportunity to build a business to last far into the future. That strategy comes from investing in our people: sales, underwriting and credit. We would have it no other way.

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