Lenders Positive About 2011 in Face of Dim Economic Outlook

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“I am far more optimistic looking ahead to 2011 than I was in 2010,” says Dan Karas, managing director at Marquette Finance Co. The first six months of 2010 were “incredibly challenging,” he says, as clients worked to improve their balance sheets amid a sluggish economic recovery.

“We have not seen a significant uptick in sales across our portfolio,” says James Cannella, president of asset-based lending at Huntington National Bank. “Our clients have cut expenses to return to profitability, but we don’t see any trend to gains in revenue.”

While 2010 was what Jon Anselma, managing partner at Paragon Financial Group, calls a “bounce-back year” for factoring and ABL, it was the result of customers wringing out expenses to restore profitability, not because of any increase in demand. Retailers have become much more efficient.

“We are seeing many businesses that are demonstrating an ability to operate in this environment,” says Michael Sharkey, president of Cole Taylor Business Capital. “This has led to a target-rich ABL environment for lenders willing to deal with a story credit.”

In short, 2011 is shaping up as an ideal year for asset-based lenders. The shakeout from the 2008-09 financial crisis has left clients in better shape. However, the economic recovery is not robust enough for banks and other competitors to come rushing back into the market.

As a result, many ABL lenders are staffing up, looking for growth of 20% or more. Also, they are taking advantage of experienced personnel who are available in the job market.

“There are a lot of displaced bankers, a lot of talent,” says Huntington’s Cannella. He plans to double the size of his staff to 21 in the coming year.

The situation is particularly favorable for Wells Fargo Capital Finance. They have carved out a niche of financing smaller ABL lenders.

“Wells Fargo Capital Finance will have an outstanding year,” says Andrea Petro. She is the head of lender finance at the unit, looking ahead to 2011, after setting new highs in 2010. “We are closing better business than I’ve ever seen, and I expect more of the same in 2011.”

Wells Fargo’s ABL clients are expanding their customer base as banks of all sizes continue to retrench. As a result, their volume is growing even though borrowing by existing clients is down 10 to 20%, Petro says.

There are in fact signs of life even in the current slow-growth environment. “We’re just starting to see more sales,” says Karas. “It’s not great growth we’re seeing; it won’t pick up much steam.”

Petro says that technology and software is one sector that is registering some growth. Healthcare receivables are also up, she says. “But we don’t expect significant overall growth due to continuing macroeconomic challenges,” she adds.

Andrew Tanenbaum, CEO of Capital Business Credit, agrees that recovery still seems feeble. Some firming in consumer sentiment has improved prospects for retailers. But he adds, “We are not expecting a lot of growth.”

Consumer products that can be used close to home seem to be benefiting the most, says David Drogos, president of BFI Finance. “Hobby things are popular,” he says. “People have to have a life,” he adds, even in the wake of a recession.

Compression suits, goggles for snowboarding, shoes for skaters, and golf clubs are among the products he sees in demand from his “micro-level” point of view on the economy. Based in the Bay area in California, Drogos also sees increased sales of wine. However, only of the moderately priced vintages.

On the other hand, some of the traditional standbys for ABL, such as construction, are dead, Drogos says. “I haven’t seen a printer in two years,” he adds.

Cole Taylor’s Sharkey expects to see an uptick in buyout financing, which just started to revive in 2010. While buyouts are not likely to get back to their pre-recession proportion of business, he says, “There is a lot of money out there chasing deals.”

Wells Fargo’s Petro also sees more competitors coming into the market as some financial institutions, after slashing costs and holding on to cash over the past year, grow restive and cautiously begin to expand.

“We welcome the added liquidity,” she says. Too often in the past year, it has been hard to syndicate some of the unit’s bigger transactions for lack of partners, she says.

Some of the added competition is coming from banks that are eager to expand their asset-based lending as cash-flow finance faces more stringent oversight from regulators.

“It seems that banks were told to get under-collateralized loans off their books in 2010”, says Paragon Financial’s Anselma. As a result, they have been terming out their loans and subordinating to factors.

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