In the following Q&A, AloStar Business Credit’s Susan Hall shares her thoughts on what it takes to manage an asset-based portfolio effectively given today’s economic and competitive realities. With 30 years of portfolio management under her belt, Hall speaks to topics ranging from the impact of bank regulations to emerging competitive forces. And, as with many things, balance is an important component in portfolio management.

ABL Advisor:  With today’s economic environment and competitive business realities in mind, how are you determining the health of your portfolio and the viability of individual deals?

Susan Hall:  An economy showing positive growth is generally a good thing for a portfolio. Increased revenues create working capital needs for a company, which is just what an asset-based lender lives for. As we say here at AloStar, we grow the businesses that grow America. However, a revved-up economy can also signal an increase in interest rates, which can cause negative stress on a company’s liquidity. We have been in such a low interest rate environment for so long that this type of risk has been overshadowed. At AloStar, we are such a flat organization we have constant contact with our clients at multiple levels within the business, which gives us a clearer picture of what is going on so we are better able to support them as they manage their capital needs.

From a competitive standpoint, there are a lot of dollars out there chasing deals. It seems like a new ABL shop opens each week. In this environment, you have to be smarter and more creative while at all times keeping focus on the risks involved in each transaction. At AloStar this means we focus on the strategy and the “story,” if you will, of each company in order to best craft a capital structure that works for that company. 

ABL Advisor: With today’s economic environment and competitive business realities in mind, what has changed in the way to you approach portfolio management today as opposed to five years ago when we were in the height of the Great Recession?

Hall:  I am not sure the overall approach to portfolio management has really changed. Whether you are looking at today’s portfolio or a portfolio from five years ago, you will have companies that are performing well and those that are struggling. The level of monitoring goes hand in hand with the performance of the company. The monitoring on an account progresses steadily as the company’s risk profile deteriorates. That being said, today’s portfolio is much stronger so portfolio managers spend much more time trying to expand relationships rather than troubleshooting.

One thing that does stand out when looking back is the importance of a strong management team. Having a strong team that is proactive in uncertain times can make the difference between a successful workout and an unsuccessful workout.

Facing the realities of a competitive landscape, it seems the existing portfolio is under attack almost immediately. Taking care of customer needs and/or requests, while at the same time, balancing the level of monitoring with the perceived risks of the deal is an important aspect of a portfolio manager’s job.

We are always proactive as it relates to reviewing our portfolio. However, in today’s more positive economic environment we are looking for opportunities to expand the credit component of our relationship. Dividend recaps, larger term loans to support capital expenditures and add on acquisitions are all on the table as options to support the growth of our portfolio companies.

ABL Advisor:  As a follow up, have any practices or ways of approaching portfolio management become outdated yet continue to be adhered to from the latest recession?

Hall:  Not really. Sound lending practices are timeless; however, we need to continue to utilize modern approaches to our traditional disciplines. For example, software is available to calculate ineligibles which is a very valuable time-saving (and thus cost saving) tool. The information flow is more real-time but the basics of what we look at haven’t changed. Technological advances have given us the ability to segment the information in a variety of ways which provides and that gives our team with a more in-depth and complete financial picture of the company.

ABL Advisor:  As syndication volume has increased (assuming it has), has this increase presented any new challenges in terms of portfolio management?

Hall:  No. Most ABL groups have a targeted ratio of direct versus indirect deals. Groups need to be disciplined to adhere to their target. Structures are loosening and people are creatively finding ways to get transactions closed. The volume in and of itself is not an issue; it has more to do with what the volume looks like and how we respond to those opportunities. The market is becoming a little less disciplined and you see organizations stretching on both on the traditional ABL type of collateral, non-traditional assets as well as pure stretch pieces. The recent changes in structure and reliance on collateral in newly structured transactions will change the underwriting and ongoing analysis that will need to be performed. Lenders will need to look at a company’s underlying cash flows and also potentially to a valuation model to determine their interest level in a particular opportunity as transactions become less reliant on traditional assets as their collateral base.

ABL Advisor:  As the regulatory environment for banks continues to intensify, how has this environment impacted the way you approach your job as a portfolio manager?

Hall:  The regulatory environment for banks has indeed intensified and seems to be ever changing. AloStar spends a good deal of time making sure we are up to date on new regulations and that we have properly implemented and executed existing regulations. The Bank Secrecy Act (BSA) has become a hot topic with more intense scrutiny being required. With this in mind, we rely heavily on our BSA officer and team to make sure we are doing everything according to policy. No transaction can be closed without the BSA team giving its approval.

ABL Advisor:  What keeps a seasoned portfolio manager with your experience up at night?

Hall:  Surprises! We impress upon our clients to let us know if there is something on the horizon that is going to negatively impact either operating performance or collateral performance. It is much easier to be proactive than reactive.

ABL Advisor:  Is there anything else you would like our readers to know?

Hall:  One thing of which we should be aware is that there are new entities in the market some of whom are familiar and some of whom are not with asset-based lending and the intricacies regarding collateral and portfolio management. 2014 is going to be an incredibly competitive year –- nontraditional players competing for transactions with traditional asset based lending players. That new competition may come from community banks, more traditional commercial banking units within financial institutions, or non-traditional lending sources such as hedge funds because we are all looking for asset growth.