The Company: Full-service mechanical contractor located in the Midwest that provides HVAC, plumbing/piping, and other mechanical services to the commercial and industrial/manufacturing sectors. Revenue: $90 MM | EBITDA: $5 MM.
The Financing Situation: The Company recently raised capital from a private equity sponsor that has invested in several construction services businesses. The new ownership group wanted to refinance its existing credit facility, but traditional bank financing was not an option as the Company typically acts as a subcontractor on construction projects that are primarily on paid-when-paid contracts. The ownership group also wanted a financing partner that could grow with the business.
The Solution: SG Credit Partners teamed up with CapitalPlus Construction Services to provide a $13.0 MM structured factoring facility based on the Company’s strong ownership group, diversified customer base, and leverage profile.
In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Greg Carasik, Executive Director of Capital Finance at UMB Bank, to understand his views on leadership, transforming UMB’s ABL group (formerly Marquette Business Credit), portfolio management and competitive environment, among other things.
Charlie Perer: Thank you for your time Greg. To begin, can you please talk about briefly about your background?
Greg Carasik:I have been working in the ABL space in various leadership capacities for more than 25 years. I spent the first 15 years of my career exclusively on the portfolio management side of the business with the balance covering all aspects of the business. I have been afforded the opportunity to work for companies in both the regulated and non-regulated environments, which has provided great perspective as we navigate today’s competitive ABL landscape.
Perer: Marquette Business Credit re-branded and restructured under the UMB Capital Finance umbrella, and you were promoted to run it. Can you please tell us about the new structure?
Carasik: Marquette Business Credit was purchased by UMB Bank in June 2015 and the group maintained the Marquette brand to prevent any disruption in the marketplace. We collectively decided in early 2019 to rebrand ourselves under UMB and simultaneously created a UMB Capital Finance platform to house our ABL, Factoring and Capital Corporation channels. The idea around UMB Capital Finance is to drive the natural synergies that exist between the channels as customers move through their life cycle of borrowing needs. We have a unique opportunity with our UMB Capital Corporation channel, which can provide minority equity and mezzanine debt, to truly satisfy the entire capital structure for our middle-market clients.
Perer: Tell us about your new role.
Carasik: In my new role, I will continue to lead the ABL channel within UMB Capital Finance, but will also now have direct responsibility for the UMB Capital Corporation channel. The decision to put Capital Corporation under my leadership was due to the natural synergies that exist and develop with our ABL clients as needs arise for non-amortizing growth capital or equity.
Perer: How big is UMB bank and where does ABL fit into its strategy?
Carasik: UMB is a $24 billion bank headquartered in Kansas City with banking offices in eight states. They were always missing a national ABL and factoring business to round out the borrowing life cycle for their clients, which is why the acquisition of Marquette in 2015 was a perfect fit. Like most banking institutions that are looking to maintain loan yields, the ABL group is an important contributor to achieving those long-term yield goals. UMB Bank has provided the ABL group all the necessary tools to grow the portfolio, so it is incumbent upon us to grow our portfolio in the right way.
Perer: What is your strategy and what is your team’s competitive advantage?
Carasik: Being acquired by UMB Bank has afforded our ABL group the flexibility to compete on a broad profile of ABL transactions based on price, structure and size. We have the internal expertise to properly manage a company in the early stage of a turnaround, the pricing power to attract and retain a strong performing client, and the trust of UMB senior management to allow us work through difficult credits. Under our current structure, we are able to really compete with both the bank ABL shops as well as the non-bank ABL groups.
Perer: Where do you see the biggest opportunity in the market today and also as we head into the next downturn?
Carasik: It’s no secret that the current marketplace is hyper-competitive, and you need to attempt to find your spots. UMB Capital Finance continues to avoid competing in the low-yield refinance market, and instead looks for more complicated transactions or companies that have experienced an event that has forced them to seek new alternative financing. Given the very senior staff within our ABL group, we are in a position to handle and tolerate the tougher credits in order to get the transaction funded, but also to not overreact when the business does not perform as expected. As far as a downturn is concerned, we are certainly well-positioned with our senior level staff to handle any stress in our portfolio, and, of course, would view a downturn as an opportunity for additional ABL prospects.
Perer: How is your team preparing for the next downturn and does having the bank as a partner help them by utilizing your group to transfer clients rather than exit them?
Carasik: Like most true ABL shops, we perform the daily blocking and tackling as part of our routine disciplines, which readies the business to handle portfolio stress from a slowing economy. We have worked closely with the UMB commercial team over the last four years to help them understand our expertise and have developed a clear strategy to move transactions back and forth between lines of business. Our expectation is that in an economic downturn, the ABL group would be an outlet for stressed C&I loans, which is an option UMB did not have prior to the acquisition of our group in 2015.
Perer: How many banks and ABLs do you see getting flat-footed by not cleaning their portfolios in time?
Carasik: I think the flat-footedness is going to be the banks that have stretched on loan structure without proportionately increasing the monitoring of those loans. Early detection is key to minimizing loan loss and without tight monitoring tools, deteriorating collateral or financial performance will be a surprise to those institutions.
Perer: You have a strong career as a portfolio manager. How has that shaped your views in terms of managing an ABL business?
Carasik: Although I’m certain my BDO staff would rather have a pure sales person running the business, lending in this current low-yield environment has made it more important to minimize loan losses through strong portfolio management in order to achieve budgeted results. Margins have continued to erode, and the only way to offset some of that is to minimize loan losses. Taking a large charge off in the portfolio requires a considerable amount of new funds employed to offset the P&L impact given the lower yield environment. We have built a very versatile portfolio management team with strong workout skills and the ability to do it with a customer-centric approach in mind. This approach is more art than science and something I have instilled in all of our client managers.
Perer: How has the ABL business changed the past decade?
Carasik: Over the last decade, ABL businesses have had to move away from exclusively lending against traditional collateral to having a much broader lens that includes cash flow lending and non-traditional asset classes. With this change, we have needed to educate our portfolio management teams as well as our internal credit committees. The results are that ABL lending continues to consume more of the total capital structure of our clients, which has impacted the second lien lenders in a meaningful way.
Perer: You have been at a number of high-profile ABL shops throughout your career. What is it about the good ones that makes them so successful and how are you applying that to your team?
Carasik: The shops that seem to have good and consistent success are those that do not deviate in their credit profile/appetite. Customers and referral sources alike need to have some level of expectations. In addition, the types of transactions you choose to pursue in the marketplace need to mirror your portfolio management capabilities. Certain bank-owned ABL shops have decided to stretch their credit appetite without recognizing they do not have the personnel to manage those types of loans. We were very fortunate to be acquired by UMB Bank, as they have allowed our credit appetite to remain intact, provided us higher credit limit capacity and of course better cost of funds. Another important aspect to a successful ABL shop is the internal support to maintain the loans in their portfolio even if they are moving toward some type of insolvency proceeding. If you have structured your portfolio management team properly, you are far better suited to manage the workout within the ABL group than moving it to a bank workout group where too much history does not translate.
Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.
Carasik: Over the last 150 days or so, we have begun to see some portfolio stress which appears to be driven by the continued realignment from the tariffs’ impact and volume reductions due to our client’s customer focusing on inventory turns. We are closely watching the management teams that continue to operate in a business-as-usual manner and we have introduced more consultants to our customers in the last 120 days than we have over the last 10 years in an attempt to help them and us manage through the changing environment. Our best long-term clients continue to be those we keep a watchful eye on and look for areas to help them better manage their business through questioning them in a strategic way.
Link to original post here.
Yet the players remain the exact same. There have been many changes to the middle-market ABL industry over the past decade, but none more seminal than the dramatic shift in underwriting methodology to include enterprise value. But what about the assets? Liquidating middle-market businesses with at least ABL net funds employed of $10+ million, and majority much higher, can be a difficult task. Specifically, when dealing with heavy-inventory situations as well as loans against non-working capital assets, such as M&E, RE and IP. It constrains internal resources, has serious risk of not returning capital and is not the preferred path to go vs. running a sale process. ABLs understand the risks and have had to adjust underwriting to factor in enterprise value as part of determining whether to get aggressive or even propose. This is much more prevalent in today’s competitive market with ABLs being asked to take on more risk for lower rates.
Why is this the case and how did we get here? Increased risk, aggressive structures and way more competition and complexity are the simple reasons, but this shift has been a long time coming as the ABL industry has transitioned to a mainstream product. The ABL industry has proliferated in terms of dollar size, number of firms and sophistication, among other things. Like many industries, the ABL industry became subject to competitive pressure, margin compression and consolidation as it grew and became widely adopted by banks and non-banks alike. The shift to becoming more mainstream created product expansion, split-lien (and other) structures, comfort with different collateral and more risk.
It’s also important to be clear that this article really pertains to ABL facility sizes starting at $10 million (on the low end) and up. Smaller companies, on average, do not typically have the liquidity or EV to merit an aggressive structure based on enterprise value. Today’s middle-market ABL landscape is the result of a lot of capital, significant non-bank entrants, years of product adoption and vastly increased private equity usage. This has forced ABL firms to adapt the product to partner with and compete with traditional cash-flow lenders as well as credit funds and BDCs. To that end, the private equity industry has had a meaningful impact on the EV-based lending shift as many ABL deals are done in support of private equity buyouts.
ABL firms now regularly provide a one-stop solution to finance not only working capital, but also M&E, real estate and even IP. Gone are the days of just financing the working-capital assets. In addition, split-lien deals with larger term lenders, SBICs and credit funds are much more prevalent as partners in deals. More complex structures and the harder-to-finance and liquidate assets create obstacles to liquidating. A sale vs. liquidation starts to become an attractive option when ABLs are in split-lien deals with meaningful non-working capital assets such as M&E. On one-hand, an ABLs has financed a lot of non-working capital assets that clearly lose value if sold piecemeal-mail and on the other hand the ABL might be in a split-lien deal and therefore might not have access to the general intangibles in a liquidation. These are just a few reasons why the industry trend for middle-market deals is to push for a distressed sale rather than a liquidation. It should also be noted that even a distressed sale does not mean either party is going to get out whole.
In today’s market, ABLs compete more so on structure than pricing if you had to point to one or the other. If you are going to compete on aggressive structure, then you need to have the sophistication to understand enterprise value as well as the distressed PE and credit market. It’s a symbiotic relationship. To compound this point, many investment banks are catering to this market by now conducting a dual-track process that includes both debt refinancing and sell-side options in case a refinancing is not feasible. This is becoming more mainstream, given the amount of investment banks who have started, expanded or spun-out of the larger firms the past several years including Configure Partners, Armory, Focal Point, Livingstone, G2 Capital Advisors and Carl Marks to name a few to compete with the existing leaders Lincoln and Houlihan Lokey, among others. The turnaround industry has experienced the same growth as the big firms – FTI, Alix, etc. have grown bigger and many of the middle market firms such as Conway Mackenzie, Phoenix, Silverman, Sierra Constellation and Winter Harbor, among others, have expanded as well.
It’s a fact that fewer middle-market ABL deals are done now without the ABL getting comfortable with the business having a reason for being and enterprise value. Simply put, the new “new” conforming ABL structure is way more complex and wide-ranging than in the past and a sale as a going-concern is a much better path out than a liquidation other than in specialized ABL niches, such as retail. Increased borrower sophistication has helped with this trend as boards of distressed businesses realizing that a sale (in or out of chapter 11) may not only get the senior out, but is much more advantageous to other constituents such as employees, management, junior lenders and, of course, the PE firms themselves. ABLs would much prefer to include a bigger availability block to provide optionality to run a fast-sale process. The challenging part of this change in methodology as it remains untested in a downturn.
ABL organizations, especially the underwriting function, have changed as well. The situations, deal structures and collateral pools have exponentially proliferated. While ABLs now have to lend against non-working capital assets and consider lending against EV or EV assets, e.g., trade names, patents, and customer lists, most ABLs don’t have the expertise to do it properly. This is creating a real competitive differentiation in the market and also material point of difference for non-bank ABLs who portend to have the sophistication, but at the same time are still reliant on lender financing to be able to execute on these aggressive structures.
The real test of underwriting sophistication will surely come in the next downturn. Most ABL shops simply over-depend on third-party valuation firms to appraise the EV assets and simply take a discount to the value when including it in the borrowing base. It’s unclear yet whether they know how to include the third-party analysis with their own. It’s a slippery slope getting this right as the difference between right and wrong is classic debt vs equity risk for low-margin debt returns. Furthermore, many new ABL shops have started at the end of the cycle as they and their investors believe now is the time to start with a clean portfolio to take advantage of other ABLs’ aggressive underwriting assumptions that might not hold up.
ABLs have not historically viewed the sale of a business as a true exit option, however, this has fundamentally changed over the past several years as the middle-market ABL product and structure has become more complex – one could say it’s a different game. We are also in the early stages of ABLs having enough outcomes to understand their EV underwriting track record given we are still in a good economic cycle. The prevailing sentiment is that it is untested whether ABLs as an industry know how to independently value businesses or how to estimate equity interest/value in a business, especially in a distressed or tight-liquidity situation. We are in a market cycle where very few underwriters or PMs can speak to this topic or risk from experience. Many are flying blind and are relying on third-party analysis that clearly does not take into account a major market correction.
ABLs should start to be less exuberant about these EV loans even if many are made to sponsor-backed businesses. We are entering a brave new world where EV lending is starting to be the norm. The question remains whether it will revert back after the next downturn. The game has changed over time, yet the returns have not and the players certainly have not. When the tide goes out, and it will, we will all know who the winners are in the age of EV underwriting. Just remember, let’s all blame the game and not each other as players in a game, when the tide goes out to shore. Remember to bring a bathing suit.
Link to full article here.
Link to full article here.
In this installment of our series of “Executive’s Corner,” guest writer Charlie Perer of SG Credit Partners sits with Scott Winicour. CEO of Gibraltar Business Capital, to understand his views on building an asset-based lending shop, national expansion, ABL consolidation, working for a BDC and the competitive environment, among other topics.
Charlie Perer: Please tell us about the history and legacy of Gibraltar prior to selling to Hercules Capital, especially how Gibraltar transformed from a factor to a respected ABL shop.
Scott Winicour: Gibraltar started in 1951 in Chicago as a factor and small ABL shop. My father, who grew up working for Heller Financial and had his own leasing business, bought Gibraltar in 1991. I started working for my father in 1995 and worked my way up to running the business. I bought out my father with the help of private equity in April of 2010 with the goal of focusing on ABL as opposed to factoring. The desire to focus on ABL stemmed from the fact that factoring yields were compressing quickly, combined with the fintech movement that I saw as a potential disruptor to factoring. In addition, we had some aggressive growth plans and we felt that focusing on larger ABL loans would allow us to grow the business more rapidly.
Perer:Hercules bought Gibraltar about two years ago. What led to the sale and how transformative has the acquisition been?
Winicour: The business really started to take off starting in 2016. We knew that we wanted to continue growing at a rapid pace and, therefore, we needed an investor that had deep access to capital and also understood our business. Hercules’ track record of success, its solid understanding of our business and its ability to raise capital was the right combination for our business model. We closed on the sale in March of 2018 and have more than doubled in size in the first 18 months since the sale. They have been phenomenal partners to work with.
Perer: Do you see more ABL acquisitions on the horizon given the counter-cyclical nature of the ABL industry?
Winicour: ABL continues to be an attractive business for a lot of different investor groups, especially with increasing banking regulation. I do not think the M&A market for ABL will slow down in the short term. Most of the stronger platforms have been recently acquired in the last few years and so it will be interesting to see what happens to valuations.
Perer: Where do you compete in the market and where do you see competitive opportunities?
Winicour: We compete primarily in the lower middle market, offering ABL facilities from $2 million to $20 million. I think our competitive advantage as a service business is our people and our focus on building long-term relationships. We pride ourselves on listening to referral sources and borrowers to understand their pain points and come up with creative structures that enable all parties to achieve their goals. I am very lucky to be surrounded by such a phenomenal and experienced staff.
Perer: Has your market position changed significantly post-acquisition?
Winicour: We were previously competing in the $1 million to $10 million credit facility space prior to being acquired by Hercules and we have leveraged the increased access to capital to go upmarket in our loan offering. As our portfolio continues to grow, I would expect us to continue to go upmarket.
Perer: How has your strategy/team evolved as Gibraltar has moved more upmarket?
Winicour: We built a very comprehensive go-to-market strategy back in 2016 that enabled us to focus on going upmarket. Part of that strategy involved a greater focus on working with financial sponsors in order to position Gibraltar as a the preferred ABL partner to lower middle market businesses backed by financial sponsors. We also spent a great deal of time on building out our culture and values. That has enabled us to attract some of the best talent in the industry.
Perer: You now have a national presence in the ABL market. How hard is it to recruit and build a national team of strong professionals in today’s market?
Winicour: Finding the right people can be just as challenging as finding the right client — maybe even harder! Fortunately, my senior management team and I have been in the industry for quite a while and have built long-standing relationships with people across the country. Having a strong culture, extremely healthy balance sheet and a track record of success has allowed us to attract extremely talented professionals.
Perer: What is your management style and has it changed as Gibraltar has grown?
Winicour: In the early days when I bought the company, I could not afford to bring on all the talent that I wanted. Therefore, I wore many hats. As the company started to evolve and we brought on more people, I had to let go of the reigns a bit and trust my people. That was difficult at first. Today, I spend the majority of my time on new business, strategy and stakeholder satisfaction. Again, I’m very lucky to be surround by such great people and especially my senior management team of Mark Stoeberl (CCO), Anthony DiChiara (Head of Sales) and Jessica Moyer (Head of Marketing & Operations). They really run the day-to-day operations of Gibraltar.
Perer: What is it like to be offensive-minded as a CEO with institutional capital rather than defensive-minded as an independent where there is no margin for error?
Winicour: Honestly, I run the business the same way as I did when I was with my father. I’ve always managed a strong credit discipline while being aggressive and opportunistic in chasing new business. The difference is that now I have strong capital partners in Hercules and my continued long-lasting relationship with Wells Fargo Capital Finance.
Perer: How much did you worry about capital as an independent and what’s it like to not have to worry about capital being owned by a BDC?
Winicour: As an independent, capital was always on my mind. Fortunately, capital never became an issue. However, not having the balance sheet I desired did restrict our growth in the early days. Now, having Hercules Capital behind us has really allowed me to focus on continuing to evolve our strategy without worrying about whether the capital will be available.
Perer: A whole host of independent ABL shops have started on both the lower and upper ends of the market. Where do you think the industry is in terms of consolidation?
Winicour: It’s hard to say as access to capital is still abundant. The new smaller players might be competitive regionally but could have challenges competing against more established national ABL lenders like Gibraltar. I don’t think we will see much consolidation until access to capital starts to dry up.
Perer: Many smaller-ticket ABL shops are thinly capitalized. Should the new and existing independent small-ticket ABL shops be worried about when the often-talked-about market correction happens?
Winicour: I hope that every ABL shop, large or small, worries about a market correction. Staying proactive is one of the many keys to success in this industry.
Perer: How do you see this playing out as the barriers to entry are low, but the barriers to continually raising capital are high?
Winicour: The key word you used in your question is continually. I think it’s still easy to raise the initial round of capital. Having deep access to continually raise capital is what really gives you the ability to scale. The industry has never been as competitive as it is today. Therefore, I think it’s going to be a challenge for newer shops to scale outside of their region.
Perer: How much do you worry about your clients’ liquidity during the next downturn given your primary focus is serving the lower middle market?
Winicour: I’m always worried about our clients’ liquidity, whether there is a downturn expected or not. It’s one of our keys to success. We plan to be out in front of that and prevent a fire before it starts.
Perer: How do you see the next downturn affecting your market?
Winicour: Our industry is one that can grow even during a downturn. In a downturn, banks will most likely exit more facilities and decline more new opportunities than they have in the past. That can be a great opportunity for ABL shops with the right credit philosophy and strong balance sheet to take advantage of the market and grow their book.
Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.
Winicour: I am extremely curious how a downturn in the economy will affect the fintech lenders that have yet to go through a full credit cycle.
Link to article here.
In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Paul Cronin to understand his views on leadership, joining Santander and competitive environment, among other things.
Charlie Perer: Thank you for your time Paul. To begin, can you please talk about your background as you have run different business lines over the years?
Paul Cronin: Thanks Charlie. This is a great series of discussions you are doing and very helpful in informing and developing the market. You are right, I started in banking about 27 years ago and have worked in different areas of corporate and commercial banking over the years, both here in the U.S. and internationally. I have worked and led teams in Capital Markets, Corporate and Leveraged Finance, Middle Market Commercial Banking, Specialized Industry Banking and International Banking. And, of course, most recently in Asset Based Lending.
Perer: What is it about ABL that excites you given your experience across different banking businesses?
Cronin: ABL is a great business with a long tradition in the U.S. The industry is a close-knit community and has great characters and stories. It is ultimately a highly customer-focused industry where the starting point is the client need. This includes growth capital for small and mid-sized companies expanding their markets, financing support of new investments and M&A, larger syndicated transactions where there is significant scale and capacity, and, of course, financing to assist customers through volatile or difficult times. It is this range of opportunity and need that is exciting. In every instance we get to deal with the principals and the business owners looking for specialized capital and credit solutions to help them reach these business goals.
Perer: You are operating in a very competitive market segment. What was it that made you join Santander?
Cronin: ABL, and of course banking in general, has always been hyper-competitive and probably is even more so at the moment with significant amounts of capital chasing limited opportunities. This means that every player must find a way to differentiate itself, whether it be relationship focus, scale and reach, product set depth, or capabilities such as ability to serve international needs. I believe Santander has all of this and more.
What I’m really excited about at Santander is the strength of the team already in place, the plans to continue building out the ABL business and commercial bank more broadly, and how the bank’s scale and depth helps clients marry international financing with ABL in the U.S.
Perer: Where does Santander fit into the competitive market in today’s ABL universe?
Cronin: Santander of course is a bank player with unique strengths and capabilities, one of the most powerful being the global advantage we offer by being one of the world’s largest banks. We get to work on financing opportunities and in markets where we can make the biggest impact, especially in sectors and companies with international and cross-border needs. We see good deal flow driven internally from our middle market and corporate bankers, our own direct origination team and from our capital markets group.
But we do so much more than lending. As I referenced, our international scope is important but also our top capabilities in cash management, capital markets, trade/supply chain, among others. We look at ABL as one of many solutions for our commercial banking clients, rather than putting it in a silo from other parts of the bank the way it is at some institutions.
Perer: Can you please speak to the international nature of the platform? Many banks talk about international, but Santander is a Spanish bank that aggressively markets cross-border capabilities.
Cronin: We are unique with our international approach in that we are a top market player with a deep, local presence in a number of our key countries. In Europe and Latin America we are among the top market share players, and in many other regions we have established institutions and boots on the ground to help deliver local insights. In our view, it works both ways — we can serve clients in the U.S. doing business overseas and support our non-U.S. customers who are setting up operations here.
Our international desks sit alongside bankers in all geographies and help facilitate collaboration across units of the bank, with the aim of providing clients with the best, seamless service.
Perer: Is ABL treated as a business line or product support for the commercial bank where the commercial bank RM always manages the account?
Cronin: ABL is a product within Santander. We work with our relationship managers in the commercial bank who have primary responsibility for how the client interacts with the bank and vice versa. It is important to our clients to have consistency through the lifetime relationship with Santander and that includes situations and times when they may not be utilizing ABL. Continuity is provided by the relationship manager. It is important to note that many times the ABL team members develop a close and understanding relationship with the clients and it is also important that we recognize this and are adaptable enough to have multiple touch points.
Perer: As each major bank treats ABL very differently, does Santander view it as a distinct business unit or as a product that is integrated with a C&I team?
Cronin: I personally prefer the product approach in a commercial bank where there is a broad platform of solutions available to the client and where the relationship is maintained and serviced through various economic and client specific cycles, and I also believe most clients prefer that approach. It works well when all parties within the bank support the approach to serving clients with the solutions that meet each need that may arise rather than trying to sell a product. And there is clear and open communication.
Perer: Where do you stand in your team building process and how hard is it to recruit top talent in this market?
Cronin: Talent is and will always be a critical factor in commercial banking. Today, there is typical competition from other banks and especially in the more junior space from non-banks including fintechs, consulting firms and investment banks. Of course, in the lending arena there has been significant competition from non-bank direct lenders in the last few years. For retention and attraction, it’s key to demonstrate the long-term stability of a bank, the history and legacy, the multiple product depth from both a client interest point of view and career development view, and of course the collaborative culture of commercial banking.
Our starting position today in ABL at Santander is strong with excellent talent across all dimensions and activities. We have a strong base on which to continue to build the team for the growth we expect in the coming years. In addition, our analyst hiring and credit training program is an important proposition in brining on new talent, and we are seeing great success there. We also continue to invest in training and development of our more senior team members.
Perer: What is your leadership style?
Cronin: I cannot say there is any one style as it has adapted over time and different circumstances call for different styles. Common to all situations is ensuring that the best team is being built, then providing role clarity, supporting the bankers doing their job, and ensuring that, through coaching, I serve the team and their needs and not have them serving me. I’ve found that it’s critical to reward the best behaviors. It’s essential to support the teams in optimizing their activities especially around risk and client service.
Perer: At what point in the market cycle do you go from competing with other large banks to non-banks?
Cronin: Competition is everywhere right now whether bank or non-bank. We just have to be disciplined about our marketing, client selection, strategic positioning and our credit management.
Perer: How have you seen the sentiment change at the senior management level at big banks when it comes to ABL?
Cronin: Over the years, I suspect ABL has moved from being a less important part of the thinking to a major contributor to growth and opportunity. ABL has moved beyond the place where we send customers that cannot be lent to elsewhere. Now, it is a core solution that can be well aligned with capital markets, M&A and middle market client acquisition. It is important in client retention through cycles but also there is the realization that ABL borrowers are loyal consumers of cash management services and capital markets products.
Perer: Why do senior bank executives seem skittish on the ABL risk profile?
Cronin: In many instances but not all, ABL borrowers will be at the higher end of the credit risk spectrum. These credits typically require a higher level of attention, review and oversight. That starts with how well the ABL team is organized and its disciplines. ABL teams have to continuously earn the trust of risk management and senior bank executives by demonstrating discipline in all areas — client selection, underwriting, portfolio management, collateral management, restructuring thinking, and communication/collaboration across the bank. If we do not earn this trust, senior executives should be skittish.
Perer: Does a European bank with significant non-U.S. assets plan for a U.S. recession differently than your peer competitor banks in the U.S.?
Cronin: We see a broad economic spectrum through our global presence, which of course some of our U.S. peers can claim. I would say we have a different perspective than purely domestic banks especially when we service customers with cross-border needs or impacts, which has been a trend for most middle market companies. We see what is actually happening on the ground in multiple geographies and are able to bring that perspective to the table with our advice to clients, so we can plan our business but also help our customers plan their businesses better for all scenarios.
Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.
Cronin: I won’t call it a worry and certainly there are better minds than me figuring this one out, but I believe longer term technological tools (including AI) have the potential to dramatically change the lending space and especially ABL. There are still significant information handoffs, human decisioning and manual processes which can easily be automated with tools. There is some resistance to this simple idea even before we get to AI level thinking. This resistance is not without basis as the regulatory environment, legacy systems including investment priorities and of course client buy-in are all real areas that must be considered.
Link to article here.
Ten years ago, a self-made entrepreneur named Darrin Ginsberg started Super G Capital, LLC with his own capital and with the goal of financing the merchant services industry (not to be confused with the MCA industry). He never set out to build a lending business and came up with the name Super G as his personal LLC based on a T-shirt his friends gave him with “G” replacing the Superman insignia. Hence, the legend of the “G” began. Cash flow lending was never part of the plan. He soon became the leading financier of merchant services and a pioneer in residual finance. Like all entrepreneurs he looked to branch out. He hired my partner and co-founder and CEO of SG Credit Partners, Inc., Marc Cole, to help raise capital and grow the business. Together Marc and Darrin obtained a commitment from an asset management firm and brought me on to start the cash flow lending division at Super G.
We found ourselves armed with capital in a sea of fintech startups, BDCs awash with cash, in addition to many other existing lending firms. To put it bluntly, we had capital and that was about it. In hindsight, we had two very important things that most specialty finance companies don’t have: capital and time. Darrin had a very successful lending business already, so we had all the time in the world to figure out direct cash flow lending. And time is what we would need. We spent the first few years of our cash flow initiative largely unproductive and meeting dead ends. Any other lending business would have been shut down by then. But then a strange thing happened, we found the asset-based lending industry… or it found us.
We knew there was a large void in the credit market that banks and ABLs could not fill, but we did not know the best channel in which to start. The ABL industry invented and perfected our product decades ago – the stretch piece or secured cash flow term loan not within the assets. We had unregulated capital, a blank canvas and a national appetite. The ABLs had the clients and know-how. Our mission became simple, be every ABLs first phone call when a stretch piece was needed. We traveled tirelessly across the country many times over with the goal of meeting as many ABLs as possible.
This simple focus made us the leader of our white space and to-date we have funded over $200 million in loans nationwide. We owe our firm’s success to the ABLs who took us in and taught us the intricacies of the business. We surely ate dirt the first few years and the going was tough, but we have found it’s a rite of passage in lending business if you can survive the minefield that awaits all new lenders. Few, if any, innovative lending firms hit a walk-off home run their first time at bat in the majors – it’s too hard and too many variables out of your control have to go your way. We were certainly no different. However, the benefit of time enabled us to live and breathe the ABL industry, and that time enabled us to start to build relationships and a track record.
If asked, I would discourage anyone from starting a bootstrapped lending business. The road is paved with failed lending business that could not weather the storm. The untold battles of getting your first referral from a respected lender or advisor to workouts to recruiting could go on for days. It’s tantamount to having a weekend to start a new football team from scratch and have to compete on day one with the rest of the NFL. Let’s also not forget the hardest part, which is capital. Capital is as precious as air in the lending business and can be fleeting the first sign of trouble. The first vintage of loans we closed tested our mettle and through the benefit of grit – and let’s face it a good economy – it got us to our second vintage of loans, where we started to get a reputation and move upmarket. A brand in any business should never be taken for granted and we will never take ours for granted as it was built on partnerships with the best senior lenders.
The past few years we started to prepare for what we knew would be a very time-consuming challenge, which was spinning the cash flow team out and raising additional institutional capital post-spin-out from Super G. We started expanding our business plan by writing larger checks – up to $5 million and beyond to start laying the ground work for moving up market. In 2018, we also formally separated from Super G by creating SG Credit Partners, Inc., which was a new company that gave us a fresh entity for new investors as well as new recruits.
The saying goes: 10 years until an overnight success. At the 10-year mark, Super G spun SG Credit out and thereafter raised institutional capital from leading specialty finance investors MidMark, Cynosure Group, and 4612. Our investors have decades of experience investing in specialty finance and for the first time in years we have the chance to build a scalable national platform. We took their permanent, family office capital based on a new vision of building a platform of credit products to work with all divisions in a bank. Our white space is to be the leading non-bank partner to every bank, bank-ABL and non-ABL for all the gaps or needs they can’t finance. This ranges from private banking to technology to cash flow lending.
The private equity ecosystem is quite competitive at each level of the capital structure, but few alternatives exist for the non-sponsored business that has a short-fuse or non-traditional capital needs. This is our vision and our mission to solve. The ABL industry will always be our partner, but as we say goodbye to the Super G name and our terrific partners there and transition to SG Credit we look forward to our next mission of being the first phone of every bank and ABL.
SG Credit Partners (“SGCP”) now offers an interest only bridge loan product designed to provide a liquidity solution for asset rich, liquidity constrained entrepreneurs when speed and certainty to close are required. We call it the “Personal Financial Statement (PFS) Loan.”
SGCP enables entrepreneurs to quickly tap into pockets of equity in their non-business asset base that traditional lenders would not consider.
SGCP can structure business loans secured by first or second liens on residential or commercial real estate, marketable securities, annuities, equity holdings in other types of investments, direction of payment from expected cash inflows and other illiquid assets.
A flexible alternative to private banking loans, SGCP gives borrowers full discretion surrounding the use of funds with limited restrictions and fewer hoops to jump through than traditional capital providers.
Why SGCP for High Net Worth Liquidity Solutions?
Speed & Certainty to Close: Our small and nimble deal team, flat decision-making, and streamlined documentation allow us to close deals within 2-3 weeks on average.
Flexibility: Creative loan structures around unique financing situations, cash flow, and available collateral; ability to consider collateral outside of other lenders’ criteria.
Use of Funds: Funding for business turnarounds, taxes, litigation, divorce, or other short-term business or personal needs.
Discretion: We value our borrowers’ privacy and take a hands-off approach regarding use of funds and business-related decisions.
SPEED • CERTAINTY • DISCRETION
Link to article here.
In this installment of our series of “Executive’s Corner,” featuring articles from guest writer Charlie Perer of SG Credit Partners, the author sits with Marty Battaglia to understand his views on leadership, market conditions and the changing competitive landscape, among other things.
Charlie Perer: You founded Encina less than 4 years ago. Has the Company grown to your expectations?
Marty Battaglia: Generally speaking, yes it has. We have been fortunate to enter the market at a time when the non-bank ABL space was a bit less overcrowded. I also attribute this to having a great capital provider in Oaktree, which clearly understands distress as well as a very good team.
Perer: What made you go the non-bank route when many of your peers stayed in traditional bank ABL?
Battaglia: Having exited the bank ABL space in 2008, I was able to observe all the changes that occurred within the bank ABL groups from the outside. I could not see myself functioning to the best of my abilities within a bank ABL group given all the structural and regulatory changes that have occurred in that space. Having worked outside banks in the past, I believe the non-bank route was the best course for me. What I did not fully appreciate at the time was how difficult and time consuming a start-up process would be.
Perer: Can you talk about the current scale of Encina?
Battaglia: It would be my pleasure. Our main office is in Chicago, which houses all credit, operations and legal functions. We also have a significant number of our underwriting team in this office as well as a couple new business officers. In Connecticut we have a smaller staff that includes underwriting, marketing and marketing support. Other locations, primarily new business, include New York, Boston, Atlanta, Charlotte, Detroit, Houston, Los Angeles and San Francisco. With 14 individuals involved in new business and marketing in various locations throughout the country, we believe we are well positioned to see market opportunities as they arise. We also have the support staff to properly administer our portfolio and deal flow. At this point our commitments total just under $1 billion.
Perer: Can you please talk about the team you have assembled? I am not sure the market truly understands the national scope of talent you have assembled from coast-to-coast.
Battaglia: We have a seasoned team of professionals across all functions of what would be considered a traditional ABL shop. This includes new business, underwriting, credit, operations as well as legal and field exam. Most of our functional leaders have 25+ years of experience and are well known in the industry. The same is true for our business development officers who, as referenced above, are in offices throughout the country. Our philosophy is that our business development officers must thoroughly understand our product and our credit appetite as they are the “tip of the sword” to the market. This makes it imperative that we have seasoned industry professionals who can deliver. We make every effort to really understand a company and their needs up front and to be as transparent as possible about our process, concerns and requirements. When we issue a proposal, we fully expect to deliver on those terms.
Our current team consists of 40 professionals and continues to grow. As we continue to expand our team, we will look to add experienced business development officers in areas or markets that are complementary to our existing coverage. We will also add to our credit, underwriting and operations staff to meet our growth. We believe in training and promoting from within.
Perer: How do you hire; and this may be an unconventional question but how do you decide who to fire? Too often people focus on recruiting versus exiting and it’s a key skill to have.
Battaglia: Finding people with the personality and work ethic who will fit well with an existing team and who possess all the technical skills required for a given position is a real challenge and one that most find very difficult. When selecting a candidate, we make every effort possible to explain the position, requirements and culture of our group. We also have several individuals interview every candidate and discuss as a group before proceeding.
We tend to provide continuous and immediate feedback when we see subpar performance. We will also make every effort possible to improve this subpar performance with training, both internal and external, and more feedback. We have found that in most cases, an individual will seek other employment opportunities in situations where they are not meeting the requirements of their position.
Perer: What is the barrier to entry to competing in the large ($20 million+) non-bank ABL market? Anyone off the street can obtain a warehouse line, so what is your moat?
Battaglia: Well if only that were the case. Attracting equity or junior capital is quite a bit more challenging that a warehouse line. While there may be a significant amount of capital available in the market today, my experience leads me to believe most junior capital providers are very leery of start-ups costs and are unwilling to risk significant levels of capital with an unproven platform or team. While there have been, and I’m sure will continue to be, groups that enter the market, most assemble a very lean or inexperienced staff to keep costs low. This coupled with the pressures to grow a book of business can lead to problems and in many cases cause them to fail. I believe we have taken a very different approach. We also understand that what we offer is dependability, consistency and flexibility. Anyone can issue a term sheet or proposal, but will they deliver?
Perer: Do you think there is too much competition from non-bank competitors and if so what will be the result?
Battaglia: Have you ever heard someone saying there isn’t too much competition? We have seen more new entrants during the past 24 months. I believe this plus increased aggressiveness from banks has led to an overall reduction in pricing as well as more aggressive loan structures and advance rates. This is all part of the current cycle we are in and something we have seen in most past cycles.
Perer: How many market cycles have you been through and will the next one be different?
Battaglia: Too many! But seriously each has its own attributes. I believe the last cycle took the greatest toll on real estate and related exposures. My view is the next will impact commercial loans to a much greater extent. While the ABL product is generally contrarian, which would indicate stronger new business, we will also need to contend with our own portfolios and capitalization.
Perer: Has your leadership or views on strategy changed over time or hardened based on past success?
Battaglia: The market is constantly changing and to an extent our strategy has and should change with those conditions. While we generally follow tried and true ABL credit principles, in order to remain relevant, I do believe we must consider market conditions and adjust accordingly. That’s not to say we ignore our operating guidelines and principles but when the market becomes very competitive, we tend to look at each deal on a case by case basis and determine our appetite to deviate where necessary to win a deal. Sometimes we simply pass.
Battaglia: I really don’t have a crystal ball although I do believe a market downturn is around the corner. As a non-bank ABL, we should experience an increase in new business opportunities during a market downturn. Our challenge is that we too are subject to contracting credit markets. Without sufficient excess credit line capacity and capital to deploy we could miss opportunities. This is a bit of a balancing act as nobody wants to pay for excess capital capacity they don’t believe they will utilize in the near future although attempting to raise this capital during a market downturn is very difficult and most likely very expensive. While one solution is to look to syndicate more, our syndication partners could experience a similar contraction.
Link to the article here.
When the credit markets dry up only a few will understand how it happened. The few that are in the know – and saw it coming – are bank-ABL industry executives who are pushing credit executives in C&I to properly risk-rate and downgrade marginal credits and transfer to ABL. Risk-rating models and politics in a bank can be subjective, not forward looking and can be interpreted with the goal of keeping clients in C&I, especially when meaningful P&L income is at risk.
Banks, like all businesses, need to make money and credit will always be malleable as consumer preferences and economies change so it is only natural that risk standards change. Furthermore, in today’s economy, banks are focused on doing more with less. Due to expense-ratio pressure, many are aggressively cutting costs including cuts to special assets, which is their first line of defense. The fact that we are in the extra innings of a credit cycle surprises very few given the past few years of lax regulations and overheating of the credit markets.
It’s impossible to time a market cycle and to do so banks would have to take aggressive proactive measures, which could easily result in significant loss of income and market share in any given market as well as reputation risk. The current cycle has led to intense competition amongst banks and a credit bubble in which every lender is a willing participant. What will surprise many is why, and it harkens back to the last cycle when, in hindsight, it should have been obvious.
We all know that the last cycle came about partly due to the credit agencies mis-rating risky assets, which enabled a highly complex system of leverage upon leverage to proliferate. We don’t need to understand the complexities of the financial system to understand the root of the cause – credit was provided to consumers to aggressively finance homes when it should not have been. Rating agencies signed off on the risk-rating of the aforementioned pools of assets and the rest is history. The next cycle will be different as the root cause will be different, but what is similar is that there is a canary in the coal mine in today’s market.
The ABL industry is the canary, with a specific focus on bank ABLs. Bank ABLs are on the front line of monitoring downgraded or watch-list C&I credits in their own banks. The internal bank equivalent of an external rating agency is the risk-rating model that banks use for privately held middle-market clients. There are a significant amount of bank credits that have borderline ratings, which often makes it a subjective and human decision to keep them within C&I rather than transfer to ABL. Privately held middle-market businesses are entirely reliant upon their respective banks’ risk-rating systems that dictate whether they stay in C&I, get transferred to the bank’s ABL group or are forced to go the non-bank route. Right now, there is significant internal friction over borderline C&I credits that should be ABL deals. Having these deals properly monitored and managed can prevent billions in losses when the credit markets turn and banks face their own liquidity challenges. “Transfer to ABL” is rarely said when P&Ls are kept separate between C&I and bank-ABL.
This is a conundrum for banks, which are generally aware of the risks, but not privy to a crystal ball that indicates exactly when the music will stop. C&I groups have fought bitterly for credits over the past decade and are loathe to give them up. This hoarding of credits has been enabled by somewhat arbitrary credit models that differ within each bank, unless dealing with the nation’s largest banks. To digress, each bank typically has its own system of rating credits. For a regulator, it is sometimes tantamount to understanding the playbook of each NFL team. The ultimate plays might be similar, but each has a different name. There is some rhyme and reason to this as big and small banks have very different risk systems and management layers so it makes sense that some will be more complex than others. For avoidance of doubt, large bank risk-ratings systems are somewhat uniform given OCC risks, but can still vary.
What should not be complex, but has proven to be a challenge, is the relationship between bank C&I groups and bank ABLs. A good bank ABL group provides strong product coverage and the ability to quickly transition C&I clients that C&I worked hard to obtain. C&I groups work incredibly hard to win middle-market customers and keep them – this has and always will be the bedrock of banking. For great credits there is never a problem, but the problem lies within the billions of dollars of credit that are ranked on the lower end of the credit spectrum. To the bank ABL professionals, these should be ABL deals.
To understand how bank C&I clients typically get transferred to bank ABL, one must understand the credit rating system in a bank. Banks typically rely on credit models that produce a rating once info is entered into the model. There is a real basis to these models, however, they are very subjective and rarely take into account or properly risk-rate what could be predictable events. Said differently, these models work perfectly in a good or moderate economy, but make it very hard to forecast what will happen. For example, an automotive supplier with customer concentration might be doing great today, but what are the odds it will continue to perform in the next downturn? The Boeing 737 Max is an example of how cancellation of one model has certainly caused issues in Boeing’s supplier base. Yet these same suppliers might have a great credit rating in their respective banks.
The list of examples goes on and the key takeaway is that a small change here or there is the difference between staying in C&I and getting transferred to ABL. Transfer to ABL typically means loss of P&L income and something most C&I groups are very sensitive to. It also means a very different client experience when they understand the reporting and collateral monitoring they now have to adhere to. One can see why banks have been holding onto assets arguably longer than they should and the ABL industry has been impatiently waiting for the next downturn.
No one thought to initially look to the rating agencies during the last economic downturn and few will think to look to risk-rating models within banks, but bank ABLs are making noise about subjective risk models not properly rating credits that should be ABL. The potential effect on the financial system is unknown, but for midsized banks, the strain will be real and painful. No one knows when the music will stop, but rest assured the ABL industry is waiting with plenty of chairs.
The Company: Venture-backed SaaS platform for digital publishing. Revenue: $6MM | Equity Raised: $30MM.
The Financing Situation: The Company’s existing debt facility was maturing and the incumbent lender was unwilling to extend due to lender fatigue and other circumstances. SG was brought in alongside an equity contribution to refinance the debt and provide additional working capital.
The Solution: SG was able to quickly get comfortable with the business due to the contracted recurring revenue, continued equity support, and opening liquidity. SG provided a $1.5MM non-formula, structured senior secured loan. The incumbent lender successfully exited the credit as desired and the Company received additional working capital. SG closed this transaction within two weeks.