W
by Shyam S. Amladi
hat is a winning strategy in assetbased lending? To win deals? Sure. But
in the process to also elevate your
group’s standing and credibility within
your institution — and in the wider
commercial-lending community.
Before discussing components of a winning strategy,
let’s examine the asset-based lending landscape.
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As I talk to practitioners about evolutionary trends
within the asset-based industry, I get divergent opinions.
Some say the asset-based lending industry has become
exceedingly complex and sophisticated. Others claim it is
“back-to-basics” time. It would be tempting to say “both
are right,” but I do favor the first group’s view. While some
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THE SECURED LENDER MARCH/APRIL 2004 VOLUME 60 NUMBER 2
asset-based lending practices and fundamental values have
remained constant and may even be self-perpetuating, the
entire industry has been transformed over the past two
decades and in the process become very complex. Compared with practices common in the industry 20 years ago,
operating today requires a different type of analysis, a
different set of values, broader knowledge of debt and
equity markets and their inner workings and, not least, a
different approach to succeed in it.
Here are some factors that make creating an assetbased loan today vs. a couple of decades ago more complex.
➤ Loan-to-collateral value plays a significant, but no
longer a critical, part in the overall credit decision
and loan structuring. Collateral may be king in a DIP
environment, but elsewhere, near-equal importance is
attached to other credit and risk factors.
➤ Sales and marketing functions, though co-dependent,
have become functionally distinct.
➤ Marketers are, and have to be, much more proficient
in credit; most have not only had training in credit
and risk management, but often a working background in both.
➤ Borrowers using asset-based lending facilities are not
only larger in size, but (and maybe because of size)
require sophisticated credit structures.
➤ Asset-based lending credit facilities are often only a
part of the overall funded debt. Asset-based lenders
have to pay close attention to other debt providers.
Some of these creditors may share equally in most, if
not all, of the rights of the asset-based lender.
➤ Indirect lending products are becoming more prevalent, led by such financial instruments as derivatives,
hedges, backup lines, securitization and offshore
credit facilities.
➤ Institutionally, most asset-based lenders are a
segment, sometimes a small segment, of their
parent’s business and have to deal with capital
allocation and “why-do-we-exist?” issues within their
own institutions.
➤ Though still labeled a “specialized lending” product,
asset-based lending shops have much more interaction with other lending and nonlending businesses
within their banks.
➤ Getting broadly marketed, asset-based lending is
attracting first-time users, many of whom are completely unfamiliar with its structuring and monitoring
nuances.
➤ Risk of loss and prudent exits are not the only factors
asset-based lenders have to manage in underwriting
and managing a portfolio; in the regulated world of
banking they have to be wary of some of the same
top-of-the-house issues that affect their banking
colleagues — ROE, risk profile, sector concentration,
criticized and classified portfolio, NPA, contingent
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exposure (e.g., under derivative contracts), industry
exceptions and syndication “fails.”
All of this tends to complicate life for an asset-based
lending marketer. Not only do fancy terms and fancier
intermediaries stymie him, but he is also dealing in an
industry where rules of the game have changed. Some
recent complaints:
“I don’t know any more what kind of a deal my company likes; my managers won’t come right out and
say it;”
“I cannot believe I have to explain cash dominion to the
idiots in the company. Again!”;
“Why did my managers reject this deal? It was an in-thebox asset-based lending deal. They won’t tell me, so I
am left guessing;”
“It’s all a black box, and by the time I figure it all out,
I’ll retire or be someplace else;”
“What do they mean, ‘it is a specialized industry and we
have to check with our industry lending group’? Last
deal I took to this group, they rejected it, because
they don’t understand leveraged capital and are
clueless about asset-based lending structures and give
us no credit for reserves, OLV, collateral monitoring
or excess availability;”
“Oh, I get it. As the committee approved it, our deal asks
the company to pay more for less availability, hogties
them, and the borrower is going to jump at it, right?
Yeah, right!”;
“They are hung up on full flex, the company wants only
pricing flex and I am screwed!”;
“Admit it, boss. Turnaround is a dirty word around
here!”
You get the picture. Sometimes getting deals approved seems a lot tougher inside than out in the market.
The process has been compared to rafting in strange rapids
where you have no control. Guidance from the top is
usually too broad-brushed, not business unit-specific. Most
financial institutions publish a mission statement that serves
both as credit guidelines and a description of its credit
culture. Often catch phrases are used, such as “focused
underwriting,” “adherence to approved credit criteria and
risk/reward matrix” and “risk-mitigation through a loan
structure that relies on comprehensive borrower and
industry due diligence and a prudent and consistent
account-management strategy.”
Many of you might be thinking, “Big deal. I did all
that and I am confused as ever. Now what?”
Since each institution is different in its credit culture
and risk appetite and each asset-based lending deal is
unique, it would be futile to try to describe individual
strategies here that will work for the marketers in winning
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approvals. Instead, let me address some of the sound
business practices that help shape a winning marketing
strategy.
How do we win deals and gain respect?
Let’s agree that a very small portion of our “wins” is pure
opportunity, i.e., being at the right time and at the right
place. Even a smaller percentage of these wins is due to a
favorable institutional bias.
And the rest? We have got to win like the old
shooters did — practice, aim and fire — and practice some
more. Translating this to the business of commercial
lending, three factors are key to a winning strategy:
Structure, reliability and economics.
Structure
A prospective borrower with a choice of lenders is likely to
compare proposals first and foremost for structural fit and
flexibility. Prospects not focused on structure or obsessed
with pricing or even reliability are being shortsighted. How
do you sell structure? More relevant, how do you turn
structure into a trump card for your deal?
A back-to-basics, common sense approach helps. The
three elements to a winning strategy for structure are:
➤ Determine a customer’s top funding priorities, match
and adjust it to market reality and incorporate into
your deal. This practice incorporates the old, but
sometimes forgotten, merchandising truism: a true
sale occurs only when the customer decides to buy
and knows why. Any sales pitch should link it to the
borrower’s needs and preferences. Trite as this may
seem, how often have we touted our institution’s
commitment to our business, our experience in the
industry, how well we rate, how large a check we can
write and how we value relationships? Is all this
important to a business? Of course it is, but less so
than obtaining a financing structure that responds to
its needs.
➤ Early on, insure the structure is internally and
externally consistent with market appetite. Some
marketers worry about only making sure it is acceptable within the institution or that it is marketable.
Internal consistency is just a good, long-term business practice, while external acceptance insures
market credibility and access.
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Consistency does not mean deal-cloning, but
rather a) making sure that the exceptions, if
any, are honestly noted and dealt with and that,
over time, exceptions do not become rule for
the asset-based lending group, b) the risk
profile of the credit and the structure are
compatible with the institution’s mandate for
your line of business and c) recognizing that
structure does not overcome an inherently sick
business or a faulty business model.
➤ Research and find comparables. Lenders and
approvers are creatures of habit. More often than not,
they find refuge and comfort in precedents and
arguably, successful precedents. If internal examples
or expert testimony are not available, look outside;
most credit officers will accept large, well-syndicated
deals completed by your competitors, even if you did
not participate.
Reliability
“Reliability” is probably as widely misused as “on-time” in
describing airline arrivals and departures and “nonrecurring
charges” in underwriting turnarounds.
Structuring asset-based lending deals at the proposal
stage and ahead of due diligence is not a task for the faint
of heart and therefore not to be taken lightly. It is fraught
with unpredictability since it is not uncommon to initiate
changes in the deal from its original proposal to final finish
as information about collateral, funds requirements, interim
performance and management comes to light during the
due-diligence process.
What does reliability mean in the context of delivering a deal? And what can you reasonably ask the borrower
to rely on?
Reliability is the ability (and conversely, your
customer’s confidence in your ability) to deliver the
promised structure in its broad frame, not the dollars
generally within the promised time frame. There are certain
assumptions on both sides. The borrower assumes that the
lender, based on his experience in financing similar deals,
has conducted preliminary due diligence to assess the
borrower’s financing requirements and determine loan
values. A lender assumes (and should communicate this
assumption) that the verbal and written information
received during the preproposal stage is current and
accurate.
In their zeal to be perceived as reliable, some lenders
take an inordinate amount of time in prework due diligence
and often lose to competition. A winning strategy takes a
balanced approach — sort of sweating broad details relative
to preproposal due diligence in coming up with a satisfactory structure. Since it is a judgment call and experience
and credibility are crucial, intercession by your “A” team
players is needed.
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Close that deal yet?
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Economics
There are three key components of income derived from a
commercial-finance transaction: a) loan pricing — its
subcomponents being usage, spread and fee income from
mandated services (e.g., syndication skim), b) future lending
and cross-sell opportunities and c) intangible benefits (new
relationship or uptiering an existing one, industry insight,
helping another group within your institution).
Winning teams make their pricing decision by relying
on what is clear and present — a) loan pricing. The “b” and
“c” components provide good talking points and may in
some instances become real over time; however, they should
not only not drive the initial pricing decision, but enter only
minimally in that decision stream. Sometimes this may make
your pricing uncompetitive when going up against a lender
who justifies a lower price by being hopeful about future
business. Over a period of time, however, this practice of
deficit-financing your deal comes up a loser. Imagine having
to rely on cross-selling or future business not just to reach
divisional profit targets, but also to justify under-yielding
relationships. In parts of the bank where this practice was
rampant, like global or large corporate lending groups, the
trend is to track and cull relationships that do not pay the
freight in today’s dollars.
Here are some factors winning teams evaluate when
pricing their transactions:
MARCH/APRIL, 2004
➤ What is the opportunity cost of not doing the deal to
our borrower and us?
➤ Are risk-reward dynamics properly aligned? Remember, we can only price a transaction for average risk
and average risk for most institutions is within a very
close tolerance range.
➤ If pricing is exceptional (favorably or unfavorably), is
this fact disclosed and circumstances explained so it
does not color subsequent transactions?
➤ Is our value-added visible, so the pricing can be
defended, if need arises?
➤ If structure works for the customer, does pricing work
for us?
➤ If pricing is matrixed, is the matrix is reasonable and
bidirectional?
The above discussion should provide some insight
into how a combination of credit discipline, forward thinking
and common sense can help you formulate a winning
strategy in structuring and winning deals satisfactory to
you, your institution and, most importantly, to your
customer. ▲
Shyam S. Amladi is senior credit officer
with FleetBoston Financial – Fleet
Capital Corp. in Chicago.
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