SG Credit Partners has started a collateral-based lending division and hired Nathalie Butler to be Managing Director, Underwriting to lead this group. Butler has over 20 years of experience including asset valuation, disposition and most recently lending. Previously she was part of the senior team that built a leading specialty finance company. This new group was formed to fill the void left by the lending community unable to finance illiquid and esoteric assets or other situational bridge needs up to $10 million in loan size.

The goal of the collateral-backed lending group is to provide liquidity solutions across a wide variety of collateral including inventory, real estate, equipment, intellectual property and high net worth assets.  “Our collateral based product is still meant to complement our bank and ABL partners providing revolvers and in certain cases to provide a comprehensive, one-lender solution for speed and efficiency to close,” said Charlie Perer, Head of Originations.

“There is a real need in the market for a firm focused on the lower end of the middle market to be able to finance multiple forms of collateral in a transaction as well as on a stand-alone basis. Today marks the start of SG Credit being able to provide a full suite of complementary solutions to the ABL community by focusing on non-conforming and esoteric assets,” said Andrew Hettinger, CIO of SG Credit.

“We are pleased to welcome Nathalie to the team. Her addition gives us a unique spectrum of collateral-based liquidity solutions to both businesses and business owners. This new line of business coupled with our national reach positions us to lead the market in financing both business and high net worth guarantor assets,” said Marc Cole, CEO of SG Credit Partners.

The Company: Digital signage SaaS platform enabling SMB & enterprise customers to easily create and manage content in real time on any number of displays, anywhere in the world. Ownership: Founders & Management. Run Rate ARR: $3mm+.

The Financing Situation: The Company had been bootstrapped with founders’ capital to date and was seeking a non-dilutive capital solution to (i) continue to grow ARR and in turn enterprise value prior to an institutional equity raise and (ii) bridge to profitability.

The Solution: SG was able to get comfortable with the Company’s earlier stage revenue due to the Company’s proven technology with enterprise clients, strong SaaS metrics, and the founders’ successful track record and continued support of the business. SG provided a $2.2mm senior secured facility with an interest-only period until the Company reaches profitability.

SG Credit Partners announced Spencer Brown and Oren Moses have each been promoted to Managing Director, Carlos Tan has been promoted to Principal and Daniel Looker and Gerardo Mora have been promoted to the role of Associate.

Both Spencer and Oren joined SG Credit Partners as founding team members and today’s announcement formally recognizes their years of hard work. Spencer moved to Denver to open an office and run a critical region. Oren joined as an underwriter and now heads all of Portfolio Management. “Building a strong time has been my top priority as CEO and I am very proud to announce these promotions,” said Marc Cole, CEO of SG Credit.

Carlos Tan heads new business development and leads deal execution for the South East region. “Promoting Carlos to Principal is a natural evolution of his transition to business development from underwriting and a clear sign of his accomplishments this past year,” said Charlie Perer, Head of Originations.

Daniel and Gerardo joined as analysts and dedicated themselves to becoming strong credit professionals.  “We are all excited to support them in their next phase of development,” said Nick Seraydarian, Managing Director.

The Company: A newly formed pharmaceutical company setup specifically to acquire, promote, and sell four prescription pharmaceutical products.

The Financing Situation: Before SG became involved, the Company had agreed to purchase four prescription pharmaceutical products using debt financing with an alternative lender. Due to capital raising issues, this lender defaulted on its financing obligation, which eroded the seller’s confidence that the deal would be finalized. When SG was introduced to the Company, the seller was fatigued and highly motivated to consummate the transaction within a two week period or was prepared to walk away. Additionally, the Company’s senior management did not want to risk losing the opportunity to acquire the assets at an attractive purchase price. Given the Company’s pro-forma revenue level was below SG’s investment criteria, SG looked to the personal balance sheet of the founder to structure a transaction and execute within the short timeframe.

The Solution: SG was able to work quickly and creatively to provide a $3.35MM loan structured primarily around the founder’s personal assets (real estate and marketable securities). SG’s speed to close allowed the Company to close the asset purchase and begin rebuilding the revenue base back to historical levels. SG’s facility is viewed by the Company as bridge financing until a broader capital facility can be raised.

This transaction highlights SG’s ability to structure and underwrite guarantor-based loans requiring creativity, flexibility, and speed to close.

Charlie Perer outlines an emerging trend of bank-owned asset-based lending divisions conducting business in a fashion similar to non-bank asset-based lenders while gaining an advantage due to the ability to price like a bank. 

Small and regional bank asset-based lenders that operate like non-bank asset-based lenders are shaping the lower end of the ABL market. To be clear, these are banks with specialty finance divisions that operate just like non-banks but are still under a bank’s umbrella and therefore price like a bank. This group of ABLs includes UMB, First Business, Crestmark, TAB Bank, MidFirst Business Credit, Cadence Business Finance (formerly Alostar Capital Finance) and Sterling National Bank, among others. Frequently, these ABLs are priced 30% less than the traditional lower middle market non-bank ABLs. They can do this while providing the same structure as the non-bank ABLs given their cost of funds. Many of the aforementioned are either industrial banks or set up as a subsidiary of their parent bank to avoid regulatory hurdles. In any event, these bank ABLs truly think, act and execute like a non-bank ABL and are becoming a national market force.

Forming the Third Tier of ABL Pricing Options

These bank-owned specialty finance ABL groups are typically priced in between traditional, larger bank ABLs and non-bank ABLs, thus creating a three-tiered pricing menu in most markets: large bank ABLs, specialty finance bank ABLs and non-bank ABLs. Advisors and borrowers now have three clear and delineated options to pursue in each market, although the credit quality and minimum funds employed are much higher for larger bank ABL deals. The void that non-bank ABLs used to fill with no competition has now become competitive on a national basis. Historically speaking, the market was two-tiered, as many of the specialty finance bank ABLs did not have national reach, while many of the non-bank ABLs achieved national scale and efficiency through acquisition. National reach and scale are the two best friends of a finance company and this has clearly not been lost on the ABLs that were acquired by business development companies and banks with specialty finance divisions. This has led to reduced pricing across the board by both constituencies, especially given the lower cost of funds that result from the BDC structure, which utilizes access to public markets to achieve cheaper capital.

The lower end of the ABL market has never been more competitive as competition converges and many firms now have national reach. BDCs and the general consolidation of ABLs has enabled lower pricing, national reach and scale. This is a recent trend, as it took both BDCs entering the market and regional banks with specialty finance ABL groups expanding nationally. In addition, new lending market entrants with specialization, including new lenders focused exclusively on the consumer products industry or non-traditional ABL such as intellectual property, real estate, and machinery and equipment, have created more options and competition. New firms, new products and more options has been great for advisors and borrowers but is clearly causing some market friction for lenders. The end-result is clear: increased competition and compressed margins. However, the market changes are not always easy to spot upfront.

That said, the primary market changing trend here is the proliferation of regional banks with specialty finance ABL groups expanding nationally rather than just regionally. These firms are focused on the lower end of the market and are not looking to go head to head with the national bank ABL groups. Rather, they have very good business plans, which hinge on leveraging their national reach and lower cost of funds to take share from the non-bank ABLs. They also can happily fund the smaller deals that larger bank ABLs avoid or are unable to complete. In this way, these firms have filled the void in the market that the larger bank ABLs used to fill by doing smaller deals. These specialty finance bank ABL groups clearly recognized this void and have been aggressive in addressing it.

The Advantages of ‘Non-Bank, Bank ABLs’

Why wouldn’t they when their value proposition is the same product at a lower price? It’s just like the saying: “Everything you can do, we can do at a lower rate.” This is the message the bank specialty finance groups are sending nationally, as these groups are a clear bright spot for their bank owners in this low rate environment. Another reason regional banks have expanded their specialty lending groups is not just to build a broader footprint and gain higher yields, but to gain treasury management income from clients that they would not have seen otherwise. While the non-bank ABLs have achieved a level of scale, it still does not match these bank ABLs that can act like a non-bank while pricing like a bank. The key change in this market is the national reach of these banks with specialty finance ABL groups.

A few years ago, just a handful of ABLs had national reach and the ones that did were non-bank ABL groups that were purchased by banks. Many banks clearly have paid attention to this trend and taken the step of hiring executives and business development officers around the country to attain national reach. Many of these groups are run by former non-bank lenders themselves, which allows them to achieve success with minimal write-offs. Write-offs kill the channel immediately and can lead to a quick demise of a startup ABL group at a bank. When done right, however, the risks are minimal, but the returns are very high. There is a reason why this market has become very competitive while banks with specialty finance groups take national share from the non-banks. Previous to this constituency, the non-bank ABLs just competed with each other rather than a disruptive group of out-of-town specialty finance bank ABL groups.

This trend is here to stay — especially as banks start to exit clients — and should play a meaningful market role for years to come given we are just entering a new cycle. The evolution of the market and shift in credit appetite and deal structures should make for an interesting demarcation in terms of risk appetite for each constituency. However, it is unclear if the market leading non-banks and banks with specialty finance groups have the capital and fortitude to stick with the strategy through a tough cycle. The majority of new entrants obviously entered the market and expanded nationally well in advance of COVID-19. So it remains to be seen what the push-pull within banks will look like when liquidations and potential losses start to occur. The dynamic between many banks and their specialty finance groups is going to be tested as most banks work-out versus liquidate because they don’t have a choice. The specialty finance ABLs certainly have a choice and, make no mistake, there will be liquidations. The tide is going to go out soon enough and we will all find out which new entrants are here to stay.

Link to article here.

SG Credit Partners today announced that Spencer Brown has been promoted to Managing Director and has opened a Colorado office. In this role, he will continue leading the coverage efforts for originating and closing structured cash flow, collateral based, recurring revenue, high net worth and special situations credit facilities in the Rocky Mountain and Southwest regions.

“Our team has continually grown and the addition of an office in Denver will strengthen our capabilities as a nation-wide credit fund,” said Marc Cole, CEO of SG Credit. “Spencer has been with the organization for several years and is well known in the market – he will significantly increase SG Credit’s regional brand awareness.” “The Rocky Mountain and Southwest regions are an integral part of our strategy and we are now positioned to continue our expansion in those key markets”, said Charlie Perer, Head of Originations.

Brown, who earned an MBA from University of Colorado at Boulder, joined SG Credit from Super G Capital with its other co-founders. Prior to Super G, Spencer worked at FirstBank and Noodles & Company (NDLS).

Link to article here.

It’s only a matter of time before SaaS lending enters mainstream ABL.  Lending to SaaS, which stands for Software as a Service, differs from traditional software in that it is deployed and made accessible to users over the internet (or in the “Cloud”), and is going to be the next ABL battleground.  Today it remains a niche lending vertical conducted mostly by tech-focused banks and nonbank credit funds.  However, this is going to change meaningfully as the SaaS industry continues to mature. There are an estimated 10,000 private SaaS companies, the vast majority of which are early stage, generating less than $3 million in annual revenue.  To put this in perspective, companies such as the wildly popular Zoom and workforce tool Slack utilize SaaS models.  The U.S. economy is well into a transformational period where many business tools are moving to the cloud.

The ABL world needs to adapt to this new vertical as the ongoing rise of the SaaS industry isn’t just anecdotal.  According to Gartner, worldwide market revenues from SaaS companies could hit $151 billion by 2022.  Eighty percent of businesses already use at least one SaaS application. These trends are only going to grow exponentially as most businesses transition from traditional, on-premise software to the Cloud.  The industry is going to experience growth, maturation and more sizeable businesses that portend great lending clients.  Interestingly, most banks classify SaaS in their ABL groups with the argument being that the recurring contracts are tantamount to a receivables-based deal.

Many of the typical ABL underwriting principles apply – multi-year contracts, customer concentration, end-customers, margins, liquidity and wind-down.  The seminal difference is understanding software contract values as opposed to hard asset values, which is still foreign to most ABLs. How would you like to lend to a mission-critical software company with 100+ clients, multi-year contracts, 80% margins and no concentration?  However, deferred revenue is often created as many, but not all, contracts actually pay upfront, which is a real concern as the service still needs to be provided. The lending metrics are also wildly different from traditional ABL – try a multiple of Monthly Recurring Revenue (“MRR”) rather than percent of AR.

When structured properly, mission-critical software provides for very attractive, low-risk opportunities even with meaningful leverage.  These businesses are already getting really aggressive leverage in the market.  Small, bootstrapped SaaS businesses are typically getting 5 to 6x MRR and bigger, PE-backed SaaS businesses are getting much higher multiples. The larger SaaS businesses truly do get treated differently given the size, scale and backing which allows them to support unheard of leverage, even for an ABL deal.  These business have strong, multi-year contracts and in a wind-down scenario these businesses should generate cash as a maintenance support is required to service existing customers.

Try winding down a SaaS business compared to an old-line manufacturer with customer concentration and aged trade.  No driving 100 miles outside of a metropolitan city to liquidate M&E, converting WIP to finished goods and dealing with unions.  Unlike many fixed-cost businesses, a good SaaS business can become cash generative overnight in a wind down by cutting out sales and marketing. What this might do is spur a new tech-oriented workout group rather than the traditional folks who are more comfortable in a tier 1 auto supplier plant than a data center.  The same principles also apply – wind downs and liquidations –but instead of a landlord waiver to get equipment or inventory it will be an Amazon Web Services waiver to keep lights on in the Cloud.

Rest assured, this market has been red hot for the past ten years, but it has not been mainstream.  The proliferation of SaaS businesses, strong lender-static pools and industry maturation is catching the attention of mainstream lenders, both bank and non-bank, SG Credit included.  Lending to SaaS has always been a hallmark of SG Credit and SaaS diversification provided a safe harbor during the COVID shutdown. As the industry continues to mature, the lending market is going to migrate from tech-focused lenders into mainstream ABL.

Today,  the larger banks in this space classify SaaS lending under ABL.  These groups are first-movers, play upmarket in the bank SaaS market by partnering mostly with brand-name private equity funds.  The market leaders operate within their own tech finance verticals within larger ABL umbrellas, meaning, each has its own dedicated underwriting, credit and portfolio management groups.  These groups need to operate independently as there are a number of clear and other metrics to consider in SaaS finance that are different than traditional ABL.  The underlying businesses at true private scale require significant industry and market diligence to determine obsolescence and other elements of technology risk, among other things, so in that sense it is quite different from traditional ABL.

To contrast, the large sponsor-focused SaaS lenders banks such as Bridge Bank, Sterling National, Signature Bank NY, Stifel, CIBC, Avid, PacWest (formerly Square 1), are firmly ensconced in the lower end of the middle market.  These banks typically work with venture-backed companies as opposed to private-equity backed, which varies greatly from the large banks.  Silicon Valley Bank deserves its own mention as many of its alumni went on to start the tech lending groups at the aforementioned banks.  Most of these banks primarily focus on SaaS companies with some type of VC or institutional backing, unlike many of the non-bank lenders such as SG Credit, Runway Growth and Accel-KKR, which have a strong focus on financing bootstrapped or earlier stage SaaS businesses to provide a financing bridge to a bank, significant equity round or acquisition.

As we sit here today, there is significant competition in several market segments – small bootstrapped to large sponsor-backed.  Competition should change as the SaaS market continues to grow, driven by companies transitioning to the Cloud. Banks are taking notice of this shift and there is a reason that SaaS has been housed in ABL groups.  This trend should continue and we are in the early innings of what should be a multi-decade industry expansion.  We are all going to be spectators in watching this industry growth transform the tech-lending landscape as mainstream ABLs start to venture into SaaS lending.

Link to article here.

The Company:

A single-asset real estate holding company operating as a subsidiary of a broader multi-family / student housing real estate syndication portfolio.

 The Financing Situation:

The Company needed capital quickly to execute on additional portfolio purchases and support working capital at the parent level, where COVID-19 restrictions had temporarily affected occupancy rates at some of the student housing assets.

 The Solution:

Although the parent company and guarantor had a demonstrated history of success, there was no single property that had a value sufficient to provide collateral coverage on the loan. By utilizing a holistic approach of looking at both business and guarantor assets, SG was able to get comfortable with a $6MM facility secured by two properties.

This transaction highlights SG’s ability to structure and underwrite collateral-based / guarantor-based loans. While many of you know us as a cash flow-based lender, we now provide special situation (balance sheet) loans requiring creativity, flexibility, and speed to close.

The Company: Sponsor-backed e-tailer of aftermarket auto parts focused on a niche of the broader aftermarket industry. The Company sells through its Company-owned DTC eCommerce channel as well as through 3rd party marketplaces. Revenue: $37MM | EBITDA: $1.4MM.

The Financing Situation: Over the past few years a series of events negatively impacted the financial performance of the Company including a heightened tariff environment in 2019. The Company was forced to recapitalize its balance sheet and restructure operations to right-size the business. The Company successfully executed its recapitalization in early 2020 by securing a temporary bridge working capital facility with an opportunistic lender. The bridge loan was off strategy for the new lender so it was seeking to exit the credit.

The Solution: SG was able to get comfortable with the Company’s proven operational turnaround, proforma profitability, inventory and receivable working capital assets, and supportive stakeholders including the sponsor, CEO, and key vendors. SG’s unitranche loan structure included a $1.4MM collateral based, interest-only term loan A driven by a borrowing base (AR and inventory) and a $700K term loan B structured around proforma cash flows. SG was able to close the deal within 2 weeks of a signed term sheet.

The Company: Sponsor-backed document scanning company that provides an array of workflow optimization services. The Company’s scanning service model, coupled with its cloud-based data hosting platform, enables it to transform physical documents to actionable digital data for its customers. Recurring Revenue: $12.5MM | Services Revenue: $3MM.

The Financing Situation: For the past few years, the Company was focused on developing its technology platform and implementing several key channel partnerships. Though the Company expects these dynamics to be fruitful in the long-term, the short-term effect was a decrease in profitability. The Company’s existing lender had provided a traditional asset-based line of credit based on eligible accounts receivable. This structure did not provide the Company with the flexibility it needed to expand sales and marketing initiatives through its new channel partnerships. Lender and borrower fatigue set in, so the Company went to market to find a debt partner that could a) look for value beyond just the assets, and b) scale with it as it executed on its growth strategy.

The Solution: SG was able to get comfortable with the Company’s strong pipeline of contracted revenue, return to profitability, revenue retention rate greater than 90%, and plethora of expansion opportunities through its new channel partnerships. SG provided a senior secured, $3MM growth capital loan structured around recurring revenue, proforma cash flow and total leverage.