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Cash-flow lending for small businesses difficult for 2011

Small and medium-sized businesses will continue to have trouble getting loans in 2011. That is unless they are willing to pay the higher costs associated with asset-based lending.

That was one of the points made Wednesday morning during the closing panel of the fourth annual, two-day Midwest conference of the Turnaround Management Association at the Greektown Casino-Hotel.

Large deals involving big corporations, where borrowers are willing to pay high yields, will continue to dominate the world of capital raising and mergers and acquisitions.

“The high-yield market is absolutely on fire. In August it had the best month ever,” said David Andrews, managing director at Credit Suisse. “We’ll book $3 billion in high-yield deals this week in the just the energy sector, alone.

“If someone came up to me today and said, `I need to raise $50 million,’ I have no idea how you do that. If you came up to me and said, I need to raise $500 million,’ I can do that,” he said.

Andrews said that the smallest high-interest-rate yield deal you can get done is about $125 million, and most are considerably higher. If you need less than that to fund growth, or buy equipment, finding a lender will continue to be difficult if you plan to base your loan on cash flow.

If you seek money based on assets, though, you’ll have a greater chance of success, to go with a higher interest rate.

“Cash-flow lending for small companies will remain difficult for the foreseeable future,” said Peter Mardaga, executive vice president of PNC Business Credit.

“Asset-based lending is the wave of the future,” said Thomas Aronson, co-founder, and principal of Chicago-based Monroe Capital LLC. “The ABL guys are licking their chops.”

“At the lower end of the middle market, there’s not much credit, especially for a company without 24 months of good earnings,” said Steve Rosen, co-CEO of Chicago-based Resilience Capital Partners.

Rosen made it clear he was not criticizing banks.

“Bankers are doing the right thing. They weren’t receiving payment for their risk. We’re seeing today what banks should be doing: pulling back a bit and managing their portfolios,” he said Rosen.

The panel said that concerns about the economy and at least two years more of low levels of home and commercial building will keep many lenders, particularly banks, conservative in their lending practices.

“Lenders say they want to put money out there, but they also want to wait and see,” said Aronson.

The panelists said that companies that have survived the recession have done a better-than-expected job of cutting costs and boosting productivity. Particularly to large corporations that have been reporting improved bottom lines.

But, said the panelists, with just about all the costs cut out that can be cut out, and about all the productivity per worker gained that can be gained — “productivity went through the roof,” said Andrews — companies will need to boost revenue to continue boosting profits, and that won’t be as easy as cutting costs in the face of a recession.

“To grow revenue organically is going to be a challenge,” said Mardaga.

Andrews said that there is a lot of schizophrenia when it comes to judging capital markets and the economy.

He pointed out that Wall Street analysts have predicted big increases in corporate profits for 2011, but at the same time have a record low number of buy ratings.

When panel moderator Kevin Carmody, managing director in the Chicago office of Southfield-based AlixPartners LLP, asked Andrews for his take on the economy over the next year, Andrews said:

“If you’d asked me that over the last 24 months, I’d have been wrong every time. You can find strong bulls. You can find hyperinflation guys. You can find deflation guys. Uncertain is real. You get two different views of the yen. You get two different views of the Euro. It will be on par in a year. It will be at $1.45. In other words, I don’t have a clue.”

Private equity companies will see a lot of deal flow next year, said the panelists. However, there will be fewer buyers than sellers. Also, expectations for big cash outs will need to be tempered if deals are to be done.

“There will be a huge pipeline of companies for sale in the market. How many of these assets will trade, we’ll see,” said Rosen.


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