The 2007 thriller No Country for Old Men starring Tommy Lee Jones speaks to the challenge of a local sheriff tasked with investigating a complex crime instigated by expert players. The genesis of the movie is that the local sheriff comes to the realization that the crime and participants are beyond the sophistication of a small-town sheriff. Today when it comes to middle-market, non-bank ABL there is no country or space for single-product ABL. Single-product ABL refers to working capital revolver capabilities only. The specialty finance bank-owned ABLs have taken over the “in-the-box” market and win on rate a majority of the time. To avoid doubt, this only refers to the middle-market ABL doing deals starting at around $20 million funded and focused on the new and evolving group of non-bank lenders serving this market. The non-bank market has materially changed in terms of capital, sophistication, and product set as the bank-ABLs have proved too strong on conforming deals. The days of non-bank, single-product ABL in the middle market are over as it is dominated by bank-ABLs.

As a non-bank ABL lender in the middle market you need more products and structuring flexibility to compete against banks and bank-ABLs. Over the past several years, existing firms and new entrants have re-defined what it means to provide and compete in non-bank ABL. The non-bank ABL market leaders are clear and what’s interesting is that a solutions-oriented approach is often marketed over an ABL-only approach. Unfortunately, the market has become so competitive that in-the-box ABL is just table-stakes to start a conversation for a non-bank. The ancillary products including cash flow term loans and FILOs are where many of the non-banks have set themselves apart. Several recent transactions of large non-bank ABLs getting bought illustrate why more products and a solutions-oriented approach is where the market is going. The market was always going to go this way given the pricing delta between bank and non-bank ABLs when it comes to single-product ABL.

Two distinct trends caused the middle-market, non-bank ABLs to evolve. The first was the national expansion of specialty finance bank-ABL groups. Bank-ABLs such as Fifth Third, Huntington and UMB built national teams from coast-to-coast specifically focused on serving sponsors and middle-market companies. These are just a few of the many bank-ABL groups that now have national reach. The middle-market bank-ABL market is now intensely competitive based on the early innovators demonstrating the path to national reach and success. The large regional banks have seen the business plan to all build national bank-owned specialty finance groups that continue to evolve.

The second trend has been BDC, insurance and other investor capital coming into the ABL market. The investment has proven to be long-term, pervasive, and very different across market segments. Specifically, though, larger BDCs have targeted the middle market with hopes of building billion dollar plus ABL businesses. The non-bank entrants into ABL have utilized more products and a different approach to combat the bank-ABLs lower cost of capital. The trade-off has clearly been cash flow term loans and an overall enterprise value approach as a secondary source of repayment, as opposed to a liquidation. The investor premise of great yield, no losses and large-scale capital deployment to create enterprise value has been too enticing to ignore. Recent market comps for middle-market, non-bank ABL acquisitions support this thesis.

Banks and bank-ABLs are currently locked in their own battle for deals and as a result are forcing every non-bank to take non-formula risk. No bank is letting go of any performing or near-performing asset that is within formula. Ironically, COVID helped the banks way more than the non-banks, but this trend should reverse at some point and credit lines between banks and non-banks should become clear soon enough. Stimulus monies will eventually run out and risk appetites between middle-market bank and non-bank owned ABL groups should be clear once the fog rolls out. Where this leaves us is a newly defined middle-market for non-banks ABLs. This market will be dominated by a handful of sophisticated platforms that provide a fundamentally different product set than both banks and bank-ABLs. With this new product set comes higher risk and more reliance on secondary forms of repayment such as enterprise value. The flip side of the coin is going to be increased non-bank market share from the innovative groups who develop their own proprietary, multi-product platform.  

“What’s the most you have ever lost in a coin toss?”-- is a famous question asked by the protagonist in No Country for Old Men. It truly is a coin toss to see which group is going to win and lose market share in the fight for middle-market ABL deals.