Large-ticket, full contact asset-based lending (ABL) is making a comeback. There was a time in the NFL when the run game, i.e. “ground and pound,” was the predominant offensive strategy. Then came Bill Walsh’s West Coast Offense that emphasized the passing game, and football changed. The game migrated to a faster pace that required less physical contact as opposed to the famously-termed “three yards and a cloud of dust” run game. Apply this to today’s large-ticket ABL market, defined as facility sizes $20 million and greater, and it has evolved into two contrasting strategies: Collateral-focused (run) versus Enterprise Value focused (pass). Another way to think about it is full contact ABL requires weekly borrowing bases, double posting cash and no Enterprise Value (EV) risk versus monthly borrowing bases, covenant driven ABL and of course a cash flow term loan supported by both cash flow and Enterprise Value. A more practical way to think about this is the full contact ABL lender is willing to get into a liquidation versus an EV ABL player who structures a deal so they can exit via a sale and are never testing their collateral thesis. There is less contact in a passing game versus a running game.

The EV lending strategy has been on a multi-year run of success but has become in many ways too competitive forcing some firms to evaluate incorporating some full contact lending into their strategy. A big driver for the demand of EV ABL or what the cash flow folks call “ABL Stretch” is when the cash flow markets are not fully open. With the cash flow markets now fully open (and they have been since September 2023), it is much harder to compete on ABL Stretch because the amount of stretch or EV does not compete with pure cash flow lenders. The confluence of increased ABL EV competition, tightened risk premium and overall loss of principal risk combined with an aggressive cash flow market has caused many EV ABL lenders to look at more collateral backed deals.  This is causing many EV ABL firms to evaluate chasing more collateral-based deals causing a cluster of competition for full contact ABL deals. The economic weather is becoming foggy making the pass game difficult and full contact is now back en vogue.

Many of the original practitioners of full contact ABL have migrated upmarket to EV lending due to consolidation and corresponding synergies with their parent owners, which are usually BDCs. Being a division of a larger entity that provides cash flow loans is clearly synergistic when an asset-based loan is needed. Thanks to consolidation by BDCs, traditional collateral-focused firms migrated primarily to sponsor-only calling, which to be competitive on bigger deals required providing an airball component in return for more equity and more covenant protection. The competition for large, EBITDA positive ABL deals is not just bank-ABLs, but rather bank cash flow and non-bank unitranche. Said differently, everyone in private credit has grown exponentially over the past decade. The private credit market has arguably evolved too rapidly and has become in many ways so over-efficient that many of these firms are now evaluating how to find a new angle. Ironically, that new angle is really looking at doing deals from their old model of collateral-only which comes with greater risk of liquidation. These deals typically come with fewer covenants, but do get a liquidity block.

Enterprise Value ABL is a specialty just as full contact, collateral-based ABL is a specialty. The deals are different i.e. cash burn versus EBITDA positive, turnaround versus acquisition, etc. The teams are often different too although not always. True, knuckle dragging collateral-based ABLs are less focused on enterprise value and do not need a secondary source of repayment. They are also less focused on preserving the sponsor relationship versus full recovery in a liquidation. There is also a flight to safety due to current market conditions where in a liquidation you are more likely to get out with a full contact deal versus an ABL EV deal. The styles and strategies have been disparate the past few years and have created clear white space between the different styles. 

Debt advisory firm Crown Partners recently released a non-bank ABL competitive market review that clearly illustrates the large-ticket firms focused on collateral-only versus the firms focused EV. Of course there is always overlap, but the chart is meant to be illustrative from a go to market perspective. What’s different right now is that more EV based firms are looking at doing more full contact deals whereas full contact firms rarely evaluate EV based ABL as it’s just not their model. None of this is to say that either model is right or wrong, but what this does is create more space for EV lenders to compete in a broader market and creates more competition for full contact only lenders.

Based on recent debt processes, this competitive trend is definitely playing out as cash-burning turnaround companies have solicited interest from a large array of constituents including collateral-based and EV-based ABL lenders. A big part of this can certainly be traced to reduced M&A activity, but also the competitive dynamics of competitive markets causing strategy shifts. Large ticket-ABL continues to evolve, and the latest iteration is clearly broadening product capabilities. What remains to be seen is what the historically focused collateral-only focused ABL lenders will do to be competitive or whether it’s certainly a function of whether they have experience on their side. Like the NFL that started out with a basic running package in the option formation, ABL started out with simple guidelines. Both have evolved into highly sophisticated industries that are now owned by large institutions.  One thing is clear, you better put your pads on as there is going to be full contact in 2024!