Secured lenders and disposition firms tend to see life through the same looking glass. After all, they both have their greatest success during volatile markets as a result of opportunities created by the downturns and upturns of the business cycle. Unfortunately, the data over the past 36 months tell a consistent story: The economy is as stable as it is flat.
According to Thomson Reuters LPC data for 2013, syndicated ABL loan volume of close to $60 billion was flat year over year, and down 40% from peak 2011 levels. New relationships sparked only 21% of this activity, with much of the current volume coming from refinancing.
Also indicative of the flat landscape, M&A activity accounted for only 7% of new loan growth in 2013. True, there have been some encouraging signs of late, such as the November 2013 merger of Office Depot and OfficeMax, and Men’s Wearhouse Inc.’s March announcement that it would acquire Jos. A. Bank Clothiers for $1.8 billion. But when you consider that M&A activity made up 33% to 35% of ABL originations during the high-growth cycle in 2006 and 2007, the contrast to today is stark.
Little wonder competition for deals is so intense. With far-fewer available deals, as well as a slew of new lenders and non-traditional platforms entering the race, pricing on syndicated loans has fallen dramatically. According to Thomson Reuters LPC, pricing in 2013 declined 10% from L+227 to L+204. This is down dramatically from the high point of L+430 seen at the depth of the recession in ’08-’09, and quickly approaching the L+150/175 range not seen since the apex of ’06-’07.
Bankruptcy filings continue to trend down as well. According to the U.S. Bankruptcy Court, 2013 filings were down 17% year over year and 41% from their height in 2010. Public auctions of companies in bankruptcy are also down more than 50% from their peak during the ’08 – ’09 period. As the economy has improved, the asset disposition industry has seen a softening in its traditional business lines. By way of example, during the ’08 economic crisis, Tiger participated in 19 retail sector public auctions with inventory assets in excess of $2 billion. Over the past year, the firm was part of only five public auctions in this sector. At the same time, wholesale disposition, remarketing services and private sale opportunities have grown considerably, as companies more aggressively manage unproductive assets.
In such a changed landscape, banks and disposition firms are correct to focus on adaptation. To win business, you have to be creative, properly aligned strategically and aggressive with respect to both price and structure. For lenders, that means continuously looking to understand the value of non-traditional assets. In particular, IP, brand value and the “relative value” of businesses are becoming big buzzwords. The trick is to cut through the hype and ask hard questions: Is the brand strong enough to attract interested parties and drive premium bids in excess of pure NOLV? Exactly how do you access the liquid value of asset types on which you have never loaned against before? Essentials such as making sure you have the right partner or that the company’s cash flows will last through the length of the process, have always been important. Today, they are even more so.
For their part, asset-disposition firms also need to be aggressive. The goal is to provide competitive advantages and enhanced recoveries by leveraging solutions tailored to today’s marketplace. Toward that end, firms are expanding their operating platforms to be able to provide more holistic approaches by aligning with a greater variety of qualified, strategic partners – from real estate and M&E/industrial partners, to brands and IP partners. These relationships are important because they can provide a competitive advantage and help tap into hidden value on emerging opportunities.
On the wholesale and industrial side, for example, we are seeing an increase in turnkey operation sales with great potential to maximize overall value to all constituencies in excess of liquidation value. Among the notable deals, in November KPS Capital Partners acquired the entirety of the assets of Furniture Brands International (including such brands as Thomasville, Broyhill and Lane) as a going-concern, as part of a Section 363 sale. For such turnkey sales to happen smoothly, a great many moving parts have to be in place and coordinated.
At times, winning business in a flat market entails stepping out of your comfort zone. Given that both lenders and dis-position firms see opportunities through the same lens, they stand to help each other tap new opportunities by ramping up their level of communication with one another. More conversations about what is happening in the marketplace can help us all achieve a common goal—producing a better product for our stakeholders.
