Russell Abrams’ Post

TINA, do you hear me? The Private ABL market is ~$5 trillion, this includes loans, leases, and secured contractual cash flows. In addition, structured credit securitizations are ~$4 trillion, so in aggregate, liquid/publicly traded securities (RMBS, CMBS, CLO, ABS) plus Private ABL equal ~$9 trillion! Private ABL managers are in the business of originating senior-secured asset-based loans & leases secured by property at LTV attachment points and DSCR that result in strong asset/cash flow coverage ratios. Like MMLs issued by companies across a wide range of industries, ABL lending is secured by assets across a wide range of sectors that include property, plant, equipment, homes, CRE, receivables, inventory, consumer assets, contractual cash flows, royalties, IP, transportation assets (e.g., aircraft/maritime/intermodal) and more. ABL has always been a huge part of finance, but it’s now come of age as fund managers are building out this business. Asset allocators are re-examining their allocation models for Private Credit, that includes both direct corporate origination funds and ABL funds. ABL is big business for firms like Marathon Asset Management as Edward Cong, Tod Trabocco, CFA, and Bruce (that’s me) are always available to discuss. Critical Point Accelerates Growth: Banks have played a huge role in ABL lending, large global banks, and regional banks alike. Basel 3 Endgame is coming, and banks are adjusting now as they must comply 2-years (2026). Basel 3 Endgame will likely have the same impact for ABL private capital (fund formation) as Basel 3 had for corporate direct lending post-GFC given the new risk capital requirement imposed on the top 30 banks that coincides with smaller banks de-risking. I envision a similar rise in ABL in the coming years, that we saw with corporate direct lending post-GFC. Based upon the need for capital to fill the open void as banks de-risk, the ABL funds business will likely be the fastest growing component within Private Credit. Given the scope of this large, diverse asset class, I expect to see ~12% annual growth for private ABL in the next 10 years, which would make ABL ~$1T Private Credit asset class. The fastest growing component for Private Credit will capture the ABL segments described in Marathon’s pie chart below. This contrasts with Private Corporate Credit direct lending which is currently ~$1.7T and comprised of two segments: Direct Lending (middle markets, lower MML, large loans, and mezz funds) & Distressed/Special Situations (Capital Solutions, DIP/Exit Finance, Distressed/Special Situations Funds); with $1.2T deployed and $500B dry powder, according to Prequin. Capital allocators and their financial consultants are adjusting weightings to include ABL as a core component within their private credit allocation models. TINA, it’s the Golden Era for Credit. What’s your (current/future) allocation to private credit?

Great post by Bruce Richards at Marathon Asset Management. For business owners: More Financing Options: As the Private Asset-Based Lending (ABL) market grows, business owners should have access to a wider range of financing options beyond traditional bank loans. This is especially relevant for businesses with solid assets like real estate, equipment, or receivables, as these can be used as collateral for loans. Potential for Better Terms: With the expansion of ABL and the shift in the lending landscape due to regulatory changes (like Basel 3 Endgame), there could be more competitive lending terms available. This might include lower interest rates or more flexible repayment terms, as more players enter the ABL space looking to lend. Strategic Growth Opportunities: The anticipated growth in the ABL market signifies that businesses could leverage this form of financing not just for survival but for strategic growth initiatives. This could be particularly beneficial in periods of expansion, acquisition, or when navigating through economic downturns. Navigating Regulatory Changes: The reference to Basel 3 Endgame suggests that as banks adjust to new regulations, they might become more selective in their lending. This presents an opportunity for business owners to explore ABL as a viable alternative, ensuring they have the capital needed to thrive even as the banking landscape evolves. The ABL market represents a significant shift in business financing, offering new opportunities for growth, sustainability, and strategic planning for business owners in various sectors. #SmallBusiness #FundingOptions #BusinessGrowth

This is really knowledge enhancing

Direct lending is often a, or the, core allocation in private credit portfolios and I suspect that this approach is fueled by the widespread misconception that direct lending is the largest part of private credit. The fact is that non-corporate debt financing is multiples larger than corporate lending. Therefore, a private credit portfolio that is overweight direct lending is arguably not reflecting the available market of private credit risk. It may be reflecting the availability of FUNDS in the market, but not the actual risk. This post emphasizes that specialty finance/ABL private credit should evolve into a new “core” allocation.

With Net Asset Value (NAV) lending doubling from 2020 to approximately $44B in 2023, this strategy is becoming more widespread among non-bank lenders. Latest studies suggest as much as $145B of capital could be committed to the category by 2030. Non-bank lenders are driving the rising adoption: NAV returns are better than direct lending and the volatility is relatively low compared to PE returns. NAV lending is certainly subject to default risk. That risk can be mitigated by strong underwriting and loan covenants, such as LTV constraints, liquidity ratio tests and portfolio company diversification requirements. SS&C’s expansive private credit expertise and our advanced technology can support the entire loan and fund lifecycle for private credit funds. To learn more about how SS&C can play a supportive role in NAV lending, check out our blog.

High interest rates are reshaping RIA lending and deal financing. We explore this trend with Dustin Mangone of PPC LOAN, James Hughes of Live Oak Bank and Derek J. Bruton of Gladstone Group Inc.. https://lnkd.in/giTHmH4C #WealthSolutionsReport #FinancialAdvisors #WealthManagement

A Guide to Asset-Based Lending in Commercial Real Estate Key takeaway: Asset-based lending (ABL) plays a crucial role in financing within the commercial real estate sector by offering flexibility, focusing on asset value rather than credit history, and enhancing liquidity. As the market continues its growth trajectory, harnessing ABL could prove instrumental for CRE investors in 2024 and beyond. ABL can be a valuable tool for those who seek faster access to capital, increased flexibility in loan structure, and financing opportunities even with limited credit history or lower cash flow from the property.

Another great week with my partners speaking to our #Sponsor #PrivateEquity #Corporate and #Strategic clients in #SoCal on what we are seeing in the debt markets and how that is impacting M&A.  The pullback in broadly syndicated loans opened a door for #PrivateCredit, which previously provided loans predominantly to the #MiddleMarket. While private credit terms are often stricter and pricing higher than a traditional syndicated loan, private credit has been perceived to be more predictable, not subject to the volatility of the syndicated loan market and perceived to act more quickly when amendments are needed. With more assets, more dry powder, and through cooperation in small club deals, private credit has become increasingly competitive with publicly traded debt (including broadly syndicated loans and bonds). The record $4.8 billion loan to Finastra in 2023 from a club of private lenders to refinance loans maturing in 2024 was of a scale that would have been inconceivable for private credit in the past. Many #BigBanks are responding to this competitive pressure and offering comparable terms, along with other bells and whistles (e.g., deposit accounts) where the bank can earn other fees. What #Sponsors Are Seeing in The Persistent #HighInterestRate Environment •       Increasing interest in noncash pay instruments for stretch leverage—i.e., Holdco #PIK or preferred equity where #Mezz or stretch leverage under a unitranche would have been preferable two years ago •       These instruments have distinct features and should be approached differently from mezzanine debt •       Greater utilization of #ABLs for liquidity in lieu of cash flow revolvers, including the rise of Private Credit ABL providers for cash-strapped borrowers stepping in with economics that look less like classic bank ABLs #Trends In the #CreditMarkets (New and Old) for Sponsors •       What were once upper middle market technologies have persistently moved down market •       Generous pro forma EBITDA adjustments (including pro forma pricing changes and new contract wins) •       Leverage Covenants with few (if any) step downs during the life of the deal •       Unlimited acquisition capacity •       Unlimited ratio incremental and incremental equivalent debt •       Unrestricted subsidiaries •       Direct lenders are offering terms designed to keep more cash in the business •       Return of the PIK toggle (all or a portion of interest, typically accompanied by 1% or 2% premium on pricing) •       CapEx and M&A deducts from excess cash flow—dollar for dollar and/or credit for committed/budgeted expenses in the years to come •       De minimis Excess Cash Flow thresholds Be well. Winston & Strawn LLP Bryan Ikegami Brendan P. Mace Sean Hilson Aaron Berlin Kyle G Foley Rachel Gray Charles Boehrer Ian Borman Jeff Cole Chip Gage Joe Devaney April Doxey William Egler Ryan Hunsaker Mounir Letayf John Kalyvas Ulrika Palsson Sara Susnjar Lynn Tanner #MandA

I think we'll see more deals like this. In some ways, it makes perfect sense. If someone else is willing to take the risk, and a deal can be made, then why not? It helps to limit risk and helps with some capital requirements. The deal also helps provide for continued growth. It will be interesting to see the regulators think of these deals. "The Cleveland-based regional bank KeyCorp has struck a loan partnership with the private equity giant Blackstone, marking the latest tie-up between banks and asset managers." "Under the deal, Blackstone will absorb risk associated with customers of Key's specialty finance lending group that fail to repay their loans, while providing a steady stream of funding for new lending." "The partnership is the latest example of nonbank lenders taking credit risk from regional banks, whose balance sheets have been somewhat constrained in the aftermath of last year's bank failures." "The core rationale for the deal is 'supporting our specialty finance lending business and its continued growth,' Randy Paine, the head of Key's institutional bank, said in an interview. But the partnership also frees up a bit more balance sheet space as the stricter rules get finalized, he noted." "Asset managers have been absorbing more of banks' credit risk — by directly buying bank loans, by taking chunks of them in the securitization market or through newer arrangements known as credit-linked notes." "In 2021, the bank and the real estate firm Welltower reached a similar deal on senior housing and skilled nursing facility loans. Paine noted that Key also has another loan partnership in place with another unnamed asset manager." "In recent weeks, Fed Chairman Jerome Powell has said he's open to significant changes to regulators' proposals, which have come under fire from industry groups." https://lnkd.in/g7Kku7MS

In 2023, the asset-based lending market saw growth in working capital commitments despite economic fluctuations. While banks experienced soft demand for new business, non-bank lenders are reporting increased demand. The ABL industry appears well-positioned to provide vital working capital support to businesses moving forward. As North America's largest non-bank non-captive financial institution, we have the expertise to help companies optimize their assets, paving the way for new opportunities. To learn more about the possibilities of asset-based lending, check out the ABF Journal's recent article : https://ow.ly/PQFI30sBOiT