- Four Questions Concerning Bitcoin’s Growing Balance Sheet Presence
- Gerber Finance Closes New Deal Under its Naturally Gerber Division
- Citizens Provides $350 Million Senior Credit Facility for Liquid Tech Solutions
- MidCap Financial Provides a $50 Million Senior Secured Revolving Credit Facility to Transfix, Inc.
- SFNet Q1 ABL Index Analysis
Takeaways from SFNet's 2021 Asset-Based Capital Conference
By Eileen Wubbe
SFNet's Asset-Based Capital Conference was held virtually March 9-11 and offered professionals in the asset-based lending, alternative asset management, private debt, private equity, distressed debt and service providers to discuss the rapidly changing economic environment and its impacts on portfolios and business opportunities. With nearly 1300 attendees, the virtual event offered more content to a broader audience than in years’ past.
Many panelists were optimistic that there would be a stronger and quicker than expected recovery in 2021. While the COVID-19 pandemic was unexpected, another playbook has been written and the industry once again showed how to be resilient and adjust to “the new normal.”
“The SFNet ABCC conference did a great job of balancing both education and networking,” said attendee Nancy Kalman, senior business development officer, United Capital Funding. “The distinguished panels were very informative with what our industry looks like today. I met several new people in the networking rooms, along with setting up many individual meetings. I even received a lead from this that looks like we will be able to fund.”
Economic & Political Outlook Panel
The conference began with the Economic & Political Outlook Panel, sponsored by TD Bank, which brought together the macro perspectives on economics, credit, and geopolitics. Jeff Wacker, head of US ABL Originations, TD Bank, served as moderator and panelists included: David Chmiel, managing director, Global Torchlight; David Mericle, economist, Goldman Sachs and Lyuba Petrova, U.S. head of Leveraged Finance, Fitch Ratings. (I would link to Jeff’s article unless this is running first?) For more detailed coverage on this panel, please read Jeffery Wacker’s recent article, The Road to Recovery: ABCC Panel Looks Ahead. Mericle began with his presentation entitled, “Quick Recovery, Dovish Fed” and reported an optimistic outlook for the remainder of 2021.
“We’re expecting a year of blowout growth, but still a fairly easy monetary policy,” Mericle said, predicting GDP growth expectations at 7.2% on a full-year basis and 8% on a Q4 basis.
This growth can be attributed to the fiscal stimulus, which provides a substantial increase to disposable income; vaccination and mass re-opening of businesses, with an estimated 60% of the nation to be immune by May; and high-income levels and pent-up savings.
The quick recovery to the U.S. labor market is also aiding in economic growth. After approximately 25 million people lost their jobs in April 2020, the number of newly unemployed has dropped sharply, and about a third of them say they are only on a temporary layoff.
“The road for the next couple of years is going to be a little bit bumpy from an inflation perspective,” Mericle added. “The bottom line is inflation is likely to look fairly high this year, despite the fact that the economy is still in fairly poor shape.”
The U.S. will get payback for those policy effects next year when government price subsidies from Congress are taken away and, as a result, we expect to spend most of next year at around 2%.
“We’ll need a historically tight labor market to get inflation up to the levels the Fed wants, sustainably above 2%,” Mericle added.
Petrova noted sectors with the highest percentage of issuers at risk of downgrades are the the usual suspects: airlines, gaming, lodging and leisure, media and retail.
“It’s important to note we won’t see the width or velocity of rating actions that we experienced in March and April of 2020,” Petrova said. “Any further downgrades will be selective and focused. Credit performance will be differentiated based on sectors’ exposure to the pandemic.”
Petrova noted airlines won’t reach 2019 levels until 2024.
Chmiel addressed the geopolitical climate, noting the pandemic has heightened equality gaps worldwide and that this will drive domestic economic and tax policy in the near- to medium-term.
Businesses also need to be aware of developments further afield. “What’s also interesting is we’re seeing these persistent rumors that the Biden administration may announce mandatory obligations on businesses not to use certain types of Chinese-made technology, particularly in semiconductors and that really does dramatically change certain elements of the global supply chain,” Chmiel said. “I think, if that happens, it would raise the importance of Japan and South Korea, from both a politico-military and economic perspective with real global consequences.”
State of the M&A Market: The Real Economy, the Deal Economy and What's Next
While many companies operating in the "Real Economy" on Main Street continue to face performance challenges and the lingering effects of COVID-19 on their business, the deal market has come back strong. Many dealmakers operating in the "Deal Economy" finished 2020 above expectations and have entered 2021 busier than ever. This panel featured proprietary data from Lincoln International's database of over 2,000 middle-market companies and explored what’s next for the M&A market. Robert Horak, managing director, Lincoln International, served as moderator, with panelists Eric Bommer, partner, Sentinel Capital Partners; Eric Malchow, managing director and president, Lincoln International North America; and Emily Wildes, managing director, Lincoln International.
Wildes discussed sales processes and noted that by post-Labor Day, people were back to business and looking toward new platforms in which to invest.
“As a banker from the sell-side selection standpoint, what we really needed to do was be more intentional with our clients on time to launch,” Wildes said. “If you had a healthcare portfolio company that did not have a disproportionate effect from COVID, you were going to receive what I call a ‘halo effect’. You were going to be seeing valuations higher during the COVID period than pre-COVID.”
New Executive Insights Sessions
New to this year’s conference were the Executive Insights Sessions, featuring executives across a variety of industries sharing how they fared during COVID and what lies ahead. John Linker, executive vice president and CFO of the world's largest window and door manufacturer, JELD-WEN, spoke with Barry Bobrow of Wells Fargo about how the building products industry adapted and thrived during 2020. Linker said the leadership team learned how to work together more and engage with employees throughout COVID, and that is what will stick around going forward.
George Hearn, VP & treasurer of Performance Food Group (PFG), one of the largest food distribution companies in the U.S. was also featured in the Executive Insights session, with moderator Daniel Denton, relationship manager, Wells Fargo Capital Finance. Hearn discussed the efforts PFG is taking going forward and how they shifted to creating and consolidating content to help restaurants navigate the new operating landscape including touchless ordering and new safety guidelines.
The Bankruptcy Panel’s overarching question was “Have we closed the door on the fallout from COVID-19 and begun a new phase of recovery and growth, or are we in the calm before the storm?” Cindi Giglio, associate general counsel, Gordon Brothers, served as moderator with panelists including Julia Frost-Davies, partner, Morgan Lewis, Mackenzie Shea, managing director, BRG and Andrew Thau, senior legal analyst, Whitebox Advisors LLC.
Panelists kicked things off by revisiting March 2020. Shea said in March companies that already filed Chapter 11, particularly retailers, saw an outcome of conversion to Chapter 7. The more fortunate companies were able to take immediate steps.
“Another group were those who came to us after weathering that storm and were focused on Q2 of 2020. First and foremost, everything comes down to a company’s liquidity,” Shea noted. “We saw pressure in terms of monetizing assets, where there was a focus on ensuring what you historically may have thought of as boot collateral, whether that is IP, insurance proceeds or tax refunds and acceleration by lenders and other constituents to get them monetized.”
Looking ahead, although 2021 was off to a slow start restructuring-wise, it was mainly due to companies that have ready access to cash in the capital markets and an active fourth quarter of 2020 in certain sectors. All panelists agreed the future will be dependent what consumer behavior looks like and which trends will stick, and which ones won’t.
Diversity in Funding - Providing Capital to Women- and Minority-Owned Businesses
The Conference’s Diversity in Funding - Providing Capital to Women- and Minority-Owned Businesses panel, sponsored by Gerber Finance Inc., featured Jennifer Palmer, CEO, Gerber Finance, Inc. as moderator. Panelists included perspectives from a borrower, advisor, lender and advisor and included Thomas Aronson, managing director & partner, Monroe Capital; Nick Antoine, co-founder and managing partner, Red Arts Capital; Lee Henderson, Americas EY Private Leader; Executive Sponsor, EY Entrepreneurs Access Network, EY and Karen Pyonin, CEO, Benco Inc.
Pyonin discussed how Benco grew from its founding in 1987 and the struggles she faced securing capital as a female CEO.
Aronson added that Monroe Capital’s successful financings have included more than $450 million to 20 women and minority-owned businesses since its inception.
Panelists offered ideas on how minority- and female-owned private equity-owned firms can change the marketplace both from an investment and lending perspective.
From an investment standpoint, Antoine shared that Red Arts Capital, a leading investment firm focused on North American-based supply chain and industrial businesses, has completed mergers and acquisitions valued at almost $200 million.
“One of our platform investments is in a diversified trucking business,” Antoine said. “In the trucking space, there is a large shortage of professional drivers. Like many other sectors, that space is lacking in diversity. Over the years, we’ve started internship and dock-to-driver programs to try to recruit people with the hopes of trying to address the shortage of drivers by incorporating more diversity. With our vendors, we ask for representation when they are offering services and we ask if there are women and people of color as part of their teams.”
Keynote Speaker, sponsored by White Oak, Kevyn Orr, Partner-in-Charge of Jones Day’s U.S. Offices
Wednesday kicked off with Keynote Speaker, sponsored by White Oak, Kevyn Orr, Partner-in-Charge of Jones Day’s U.S. Offices in Washington, D.C. Orr was appointed in 2013 by the then-governor of Michigan to be the Emergency Manager of Detroit as it went through a financial restructuring. Building on that unique experience, Orr’s current practice focuses in part on other states and municipalities to address financial and restructuring issues. Orr addressed the current environment for entities in this area, his client base, and the unique issues that arise in restructurings when they are in the public sector.
Orr addressed the state of municipal restructuring versus the private sector and Chapter 9 vs. 11 and discussed his past experience and the state of the infrastructure in the U.S. and where the country is headed as well as how COVID-19 impacted states and municipalities.
ABL Perspectives from Midsize Banks
In this panel, sponsored by CIT Commercial Finance, representatives from mid-size and regional banks offered their views on the ABL market, how it will evolve in 2021 and how they differentiate themselves from their larger competitors. Panelists discussed what their institutions have to offer customers that sets them apart.
Chris Esposito, head of Asset Based Lending, CIT Commercial Finance, served as moderator with panelists including: Joe Kwasny, managing director, business development, Huntington Business Credit, Doug Motl, SVP, director of Originations, UMB Capital Finance and Dave Viggiano, business leader ABL, Sterling National Bank.
Most panelists agreed pricing and structure has returned to pre-pandemic levels and competition from non-banks has increased. Mid-size to large companies fared reasonably well through this cycle. Thanks to Zoom, it’s not uncommon for five or six banks to bid on a deal, followed by two to three rounds, so pricing consolidates further.
“If we’re going to win business, we’re going to have to be aggressive, either from an advance rate perspective, or maybe we’ll put a little stretch piece in, maybe a term loan, something that’s not down the middle,” Viggiano said. “If you’re going to go down the middle, you’re going to wind up with no price and very little return. We try to bet on good management teams and putting a special emphasis on the right industries today, particularly now since we’re a little outside of where we normally like to be in terms of structure.”
Motl added he is seeing pressure in ways that go beyond pricing and structure, especially in situations where intermediaries are involved in raising debt. He noted that negotiations in some cases reach to the amount and scope of diligence to be performed and who performs it.
“Everyone is back in the market with make-up growth expectations,” added Kwasny. “The sponsor community has come back really strongly, in the second half of 2020 and into 2021.”
During the new business courting process, Kwasny said Huntington tries to give customers access to the decision makers at the bank and engage in conversations with business owners to support long-term business initiatives.
For syndicated deals, “The goal is to establish yourself as more than just a credit provider and be a financial advisor to your businesses and walk them through that process,” Kwasny said.
Viggiano said Sterling formalized policies and proposal process and encouraged employees to have one-off conversations.
“Customers are braver in asking for things, over an e-mail moreso now instead of out to lunch. We’re in a water cooler business and there’s no more water cooler. You have try to really work hard at creating situations where you’re comfortable making a phone call and reaching out on an informal basis.”
Motl said UMB had a great year and benefitted from the volatility with new deals as a result.
Kwasny reported Huntington Business Credit saw a record year. “We leaned into new business development in the second quarter of 2020. We spent a lot of time on LinkedIn and improving our electronic marketing since the pandemic. We’ve had to be more creative in getting people’s attention and adding value.”
SFNet continues to offer virtual events, and will also offer in-person components to its Independent Finance Roundtable and YoPro Leadership Summit, both held in August in Chicago. To view all of SFNet’s upcoming events, please click here.