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September 22, 2020

Dances With Wolves: The Importance of Having the Right BDO in Out-of-Footprint ABL

In the 1990 film “Dances With Wolves,” Kevin Costner starred as a decorated army commander in the 1860s who volunteers to oversee the furthest outpost on the Western frontier. Out-of-footprint asset-based lending business development officers are filling a similar role in the current lending environment, dancing with wolves outside of their bank’s retail footprint, although this applies to non-bank ABL BDOs as well. Each non-bank ABL BDO understands what it is like to compete without a bank footprint, but it is a different adventure when your bank hires or sends you out of network to open up a new market and scout for deals. This means you are on the frontier of the lending world without backup.

All BDOs are not created equally, which can create advantages when selling within your footprint. Think of whichever bank or banks dominate the branding, retail branches and deposits in your city and those are the ones with a tacit advantage. Customers understand the strength of these banks and the legacy of their brands. The BDOs selling out of market have to adapt to living on the edge of the frontier, meaning they are selling without the backup of the bank. The non-bank BDOs are used to dealing with their only product being credit, but in the past decade, several bank ABLs took the initiative to push the frontier with the goal of establishing a coast-to-coast ABL presence.

Banks Push the Frontier

Having national coverage is one of several key attributes needed to become a successful ABL shop. This speaks to all market participants, as the goal is to service your referral network and sponsor community. These relationships are ultimately local, in-market relationships, so you need BDOs who can cover all markets regardless of where the ABL group is headquartered. Not surprisingly, many (although not all) successful bank ABL groups that expanded are Midwest-based entities, including UMB, Fifth Third, Huntington, First Business and Alostar (now Cadence), who successfully built national bank ABL practices out of their bank’s core footprint. This was partially done with a focus on sponsors, which dictate the need for national coverage, but were just as much driven by the strategy of pushing the frontier. The Midwest is a key manufacturing hub as well as the bedrock of the ABL business, so it makes sense that many of the ABL groups would love to expand coast to coast.

With such a high degree of difficulty in this endeavor, success hinges on a bank or non-bank being committed to the market and, most importantly, hiring the right BDO. Lack of brand recognition out of footprint limits the potential success of direct calling efforts. Also, different time zones play a factor as well. West Coast BDOs have notoriously had a disadvantage when their portfolio management group was in another time zone. Talk about not being on the same page. In addition, there are no internal bank referrals to be had when your bank’s headquarters is in another state. These are but a few reasons why it takes commitment and the right BDO with established referral source relationships in place already. Success and the perception of the bank or non-bank in each particular market is correlated to finding the right hire. It is very difficult to compete otherwise.

Increasing Competition

The combination of bank ABL out of network, bank-ABL in network and non-bank ABL BDOs the past decade has created an efficient market with intense competition. The bank ABL BDOs that set up shop out of network are almost always BDOs with strong credit skills and are oftentimes priced in between the big bank ABL groups and non-bank ABLs. This creates three tiers of ABL pricing in a market and plenty of options from which to choose for companies and their advisors. The out-of-network bank ABLs typically are able to be competitive on both price and structure, which is why this expansion model has been so successful, especially in the sponsor community.

Sponsors are less loyal to local bank branding and far more interested in building sophisticated lender relationships. They got this with the out of network bank ABLs as they expanded to new cities for lending relationships more than deposits. It’s a different dynamic when the relationship is principally focused on lending rather than treasury and that’s exactly what we’ve seen. The success of many of these regional bank ABL groups that expanded nationally has emboldened more competition as these bank ABLs operate very similarly to their non-bank competitors. You need to be tactile when on the frontier, meaning these are low overhead operations. Basically, good lenders who were hired far away from headquarters are using their bank’s balance sheet to go out and book deals. It’s a great proposition and a market study would clearly illustrate the amount of banks that have seen the seemingly low barriers to entering new markets.

Each group is one good hire away from competing in a new market. Entering is one thing, but competing is very different. It is similar to the visiting team (out-of-footprint) vs. home team (in-footprint) — they call it home field advantage for a reason. Commitment to the market is crucial and too much employee churn will be noticed. It’s a tenuous proposition when an institution’s reputation in any given out-of-network market is entrusted with one person. This is why it takes a special breed of BDO to be successful, and the repercussions of a bad hire can be felt in a market for years. The internal and external skills are different because the onus falls on the BDO to not only know credit but also to be able to sell internally just as easily as externally.

This partly explains why the groups that have succeeded are really bank ABL groups that think and act like non-banks. These are lenders first who understand risk and can undercut their non-bank competition and be way more aggressive on structure than their in-market bank ABL competitors. This trend is here to stay and will only continue to increase competition. Stay away from the BDOs who dance with wolves — they are out to steal your clients.

Charlie Perer is the co-founder and head of originations of SG Credit Partners. Perer appreciates feedback and can be reached at charlie@localhost.

Link to full article here.