“Asset-Based Loans Surge in Tight Market”

by Julie Satow

When Home Depot went to sell its struggling wholesale distribution business last month amid turmoil in the markets, the price for the unit, HD Supply, was dropped to $8.5 billion from more than $10 billion. Even with a cheaper price tag, the buyers — a consortium of private equity firms including affiliates of Bain Capital Partners, the Carlyle Group, and Clayton, Dubilier & Rice — had to finance the acquisition with a $2 billion asset-based loan. In other words, the buyers had to offer up its assets as collateral.

“Asset-based loans are a very viable market, and in this environment it will experience significant rapid growth,” a managing director and underwriting and syndication executive at Wachovia Capital Finance, Barry Bobrow, said. With the credit market in turmoil and liquidity all but dried up, more companies are turning to asset-based loans, or loans collateralized with such things as inventory and receivables. Hedge funds and private equity firms that need to borrow money to complete acquisitions are tapping this market at an increasing rate, using the assets of the companies they are acquiring as the basis for their loans. In addition, companies that need loans to fund their working capital are increasingly going to banks that offer these ABLs, as they are known.

Wachovia, which has $8.5 billion of asset-based loans in its portfolio, says the number of deals it is working on has increased 84% over past year, and in the past month its deal pipeline has jumped 27%. The ABL market as a whole surged 16.5%, to nearly $500 billion, in 2006 from the previous year, according to the most recent data from the Commercial Finance Association, the industry trade organization.

“Whenever there is a disruption in the market, it is a wonderful opportunity for lenders like us,” the chairman of New Yorkbased Sterling National Bank, Louis Cappelli, said. “I have seen an increase in interest in the last four to six weeks, but I think it will continue to go up significantly.”

The president of asset-based lender Access Capital, Miles Stuchin, said a company visited his Midtown office earlier this week that “has been a major customer at one of the commercial banks, but it needed to increase its line of credit and the bank is resisting, so it came to us,” he said. “It isn’t that the commercial banks today are saying no, they are just not saying anything and leaving prospects in limbo. When we get later into this cycle, the banks will start saying no — they won’t even take people’s calls.”

As banks tighten their lending standards, more companies and funds are searching out asset-based lenders.

“Over the past few months we have seen an increase in requests for acquisition financing, and there are several deals of this type in our system now,” a managing director and executive for the northern region at Wachovia Capital Finance, Andrew Robin, said. Many of these deals involve private companies and financiers, so the information is not public.

This is not the first time that the asset-based loan market has benefited from a liquidity crunch. In the early 1990s, the last time the market slowed, the industry saw enormous growth. “It was the biggest growth spurt in the history of this business,” a managing director and business development manager at Wachovia Capital Finance, Barry Kastner, said.

There are limitations to the ABL market. For one, ABLs are available only to companies that have inventory or receivables, such as retailers or distributors. In New York, there are relatively few of these types of companies. However, the city has a large number of hedge fund and private equity firms who acquire these companies, and whose purchasing power has been severely curtailed by the tight credit market. For them, the ABL market can be a critical source of financing to continue growing.

“New York isn’t especially prolific in manufacturing or distribution, but we certainly have a significant number of financial sponsors,” Mr. Kastner said. “They are going to continue buying companies, and we expect they will use asset-based loans to finance their transactions.”