Some industry sectors—those that feature significant working capital, receivables and inventory—generally fit the ABL model better than others. Steel mills, metals, consumer products companies with distribution facilities and retailers with inventory are generally made for ABL, Wells Fargo’s Kuriger says. He adds that ABL lenders are looking to extend their reach to the technology industry and healthcare, which together comprise a significant portion of the nation’s gross domestic product. Similarly, he says, banks are looking to expand geographically and follow their borrowers to the east and south, as far as Europe and Asia. (Obtaining perfected security interests and enforcing them can be a challenge, he acknowledges, but one that can be overcome.)
Berk sees lending challenges ahead in the energy subsectors of coal and hydraulic fracturing, but for the opposite reasons. The Obama administration and the U.S. Environmental Protection Agency look with disfavor on coal and plants that burn coal, Berk says, putting increasing pressure on the relatively few coal players that survive. “Coal is long past its peak and there’s no indication it will take off again, so the risk in investing in coal is high. Fracking is the opposite. If you’re investing there, you’re on the early side of the curve and there appears to be a huge reserve of natural gas in the United States and elsewhere. As quickly as fracking has taken off, there are players all over the landscape, from mom-andpop operators to multinationals,” he says. “The industry is volatile due to pricing and regulation, and because it’s so new, there is likely to be quite a bit of shakeout. The smaller players will combine to create bigger ones, or they’ll go away. Even if you’re right on the industry, you still have to pick the right horse.”
As for healthcare, Berk sees an industry in flux—“flogged to death in the newspaper every day”—and a tricky investment landscape that extends to affiliated businesses in healthcare, such as pharmaceutical, medical devices and supplies, and assisted living, among others. “Healthcare doesn’t go away,” he acknowledges, “but it will be challenging to figure out where companies stand with regard to new rules and, as a result, which are the solid investments.”
The bottom line, Berk says: “As you see capital flow to favored industries, it becomes harder to raise capital for those that are out of favor. Refinancings become more challenging, and that results in sales and reorganization.”
Says Kuriger: “Lenders know they need to expand into different industries, and the way they’ll do it is to slowly build expertise in those sectors. They’ll do a small deal, then a couple of small deals, learn from their mistakes, learn to evaluate collateral and then do larger deals in those industries for the better credits. They’ll look especially to strong companies to minimize the likelihood they’ll have to test their ABL asset valuation assumptions because the risk of default is so low. As an industry, we came through Lehman in decent shape because we stuck to the disciplines of asset-based lending, and that’s what we’ll try to continue to do.”