ABL Market Update – Q3 2025: Resilience in the Face of Macro Bifurcation

In Q3 2025, the asset-based lending (ABL) market continued its cautious rebound amid a complex macroeconomic backdrop marked by uneven sector performance, delayed federal data reporting, and shifting Federal Reserve policy expectations. Data from LSEG LPC and the Secured Finance Network’s (SFNet) Quarterly ABL Survey reveals a stable-to-improving trend in ABL activity—driven by stronger equipment-related investment, opportunistic M&A, and growing demand from liquidity-seeking borrowers in volatile sectors.

Syndicated ABL volume in Q3 reached $24.3 billion, according to LSEG LPC, representing a 12% quarter-over-quarter increase, and continuing the positive trend that began in Q2. Utilization rates for both banks and non-banks edged higher, supported by increased working capital needs and more active borrowing bases. SFNet’s Q3 ABL survey, which includes both syndicated and non-syndicated deals, confirmed this momentum, showing notable growth in both outstanding commitments and drawdowns across most borrower cohorts

Macroeconomic Crosscurrents: Bifurcation and Uncertainty

The Q3 macroeconomic environment remained fractured. On one side, GDP growth estimates ranged between 2.5% and 4%, primarily driven by capital investment in AI infrastructure and data centers. On the other hand, traditional manufacturing and construction remained weak, with the ISM Manufacturing PMI staying below 50 for multiple months, a sign of contraction.

Labor market data was equally mixed. After weak results in early summer, September showed signs of a rebound, particularly in healthcare and social services. However, recent ADP data suggests slowdowns in small business hiring, and consumer spending softened despite a strong Black Friday, reflecting a wealth-effect divide: affluent households continued to spend, while lower-income segments reduced spending on essentials.

This bifurcation is impacting borrower behavior. ABL lenders are seeing more aggressive borrowing from lower- and middle-market borrowers, particularly those operating in sectors facing commodity volatility or supply chain recalibration.

Portfolio Performance: Holding Strong Despite Pockets of Risk

Portfolio health in the ABL space remains sound. According to SFNet’s Q3 report, classified and criticized loans have not increased significantly, and loss rates remain low, especially among banks.

Non-bank portfolios are stable, though participants cited concerns about deal complexity, especially in structures involving SPVs, warehouse facilities, or layered receivable financing. Following several recent fraud incidents primarily within asset-based finance structures, have led lenders to tightened field exam protocols and enhanced internal controls.

Rising Non-Bank Demand and the “Chunky” Deal Trend

One of the most interesting dynamics this quarter is the continued strength in non-bank ABL growth, which rose 17.5% year-over-year, per SFNet. Non-bank lenders reported deal flow as “chunky,” with Q3 seeing the return of larger syndicated ABL deals into the private space. Notably, more PE-owned or sponsor-backed borrowers are gravitating toward non-bank ABL lines, as traditional bank risk appetite remains cautious.

This shift mirrors broader trends in private credit. According to Preqin, private credit AUM is expected to surpass $1.7 trillion by year-end 2025, with direct lending and asset-based credit strategies drawing new inflows as investors seek yield in a lower-rate environment.

Fed Policy, Rates, and the Forward Curve

As of Q3 close, the Federal Reserve has executed three rate cuts in 2025, bringing the federal funds rate down to a target range of 4.25–4.50%, as inflation cooled and labor market slack grew. Market participants now anticipate a pause through Q4, with another potential cut in early 2026.

Syndicated Market Revival and M&A Synergies

The LSEG LPC data also shows a slow but steady revival in M&A-related ABL volume, which accounted for nearly 25% of syndicated deals in Q3, up from 17% in Q1. Industry sectors such as logistics, metals, and packaging have seen increased activity, reflecting bargain-buying and defensive consolidation amid uncertain pricing environments.

Utilization and Commitment Trends

Overall ABL utilization improved for both banks and non-banks in Q3, with some regional banks reporting utilization nearing the non-bank average of 50%, compared to 45% in late 2024. Outstanding commitments among banks grew slightly, reversing earlier declines. Interestingly, headcount investment has resumed modestly among larger lenders, indicating long-term optimism about sector resilience despite tighter deal screens.

Regulatory and Structural Watchpoints

The growing complexity of deal structures—often involving multiple layers of subordination, warehouse vehicles, and delayed receivable reporting—has heightened scrutiny from both lenders and regulators. Following fraudulent borrowing base practices uncovered in late 2024, SFNet members report increased field exam frequency, use of third-party audit tech, and tighter terms for borrowing base certificates.

According to The Lead Left and Moody’s, the focus is shifting to “real-time risk visibility” and data-driven portfolio oversight, particularly as stress builds in commodity-exposed industries.

Outlook: Constructive, Cautious, and Competitive

Looking ahead to Q4 and early 2026, the ABL industry appears poised for moderate expansion, contingent on continued stability in credit performance and macroeconomic clarity. KeyBridge’s economists, who advised on the SFNet Q3 report, forecast a cooling of AI-driven capital investment—a possible signal that current GDP growth may moderate in Q4.

Still, ABL remains a go-to liquidity solution in times of uncertainty. Still, ABL remains a go-to liquidity solution in times of uncertainty. As one banker put it: “ABL isn’t retreating. It’s just becoming more discerning.”

This article was created with the assistance of ChatGPT.