[Kevin Henry-Seacoast]

Hey DF,

I have been noticing some trends that are somewhat alarming if we enter another recession or if the economy slows. Since 2010 business owners have had access to relatively cheap capital in all forms from every Tom, Dick, Harry, Sally, and Aunt Sookie. Institutions across the board have been in a street fight to deploy capital and have bent over backwards to win deals. I have seen a few of these deals where sales have slipped and the Company is being asked to leave by their bank, but there is no way out. Most of these have been ABL deals.... Here's the reason why....
Normally an ABL lender will finance receivables, inventory, and M&E to provide flexible working capital for their clients. Normally receivables are given the most liquidity advance as it is the most liquid asset. Inventory and M&E are advance rates range from 33% to 50% of cost and advances are capped at 33% or 55% of receivables outstanding. This is a smart structure because if sales slow you don't get over advanced or trapped in non liquid assets. This is how ABL deals should be structured, but it's not what has been going on for the last 2 years. In efforts to deploy capital ABL lenders have gotten loose with caps and structures. I have seen several deals recently where inventory and M&E were not capped to AR. This is a receipt for disaster if sales slow. When sales slow the business owner draws down as much on their line as possible so they can pay their bills or start funding losses. The issue is you can't get out if things continue to go south.
Now comes the real problem..... Since 2010 institutions have trimmed down their workout departments. If a lot of deals go south, the bank is not going to even consider workout....they are going to want out of the deal as fast as possible. Unfortunately they structured themselves into a whole and it's going to be very hard to get out.

Best,

KH

[Kevin Henry-Seacoast]

I actually saw a deal a few months ago where some bank gave a client a $15Mil ABL facility. The client could go 100% of the $15Mil on inventory alone.......it's all consignment inventory stored in customer warehouses....... Priced at LIBOR + 2. Dumb...very dumb....