In this new feature, Charlie Perer of SG Credit Partners, sits with two leading attorneys to discuss the state of the legal landscape in the commercial finance industry, the dynamic nature of the role and general market dynamics. The purpose of this series is to hear from a group of leaders who focus specifically on providing legal counsel to asset-based lenders (ABLs) to ascertain their market views and how they are positioning their business.

Here to tell the story are Victor Des Laurier of Thompson Coburn and Jordan Klein of Winston & Strawn.

Charlie Perer: Please briefly introduce yourselves.

Victor Des Laurier: I advise funds, banks and other financial services institutions on primarily ABL transactions, both syndicated and bilateral. I have extensive experience in loan workouts, restructurings and voluntary and involuntary liquidations. My clients rely on my ability to help protect their investments, resolve problems and keep them well-advised on market practices. I lead Thompson Coburn’s Chicago Banking and Commercial Finance practice and co-chair the firm’s national Banking and Commercial Finance Practice. I also serve as a member of the firm's Executive Committee and Management Committee.

Jordan Klein: Thanks, Charlie. I am the Co-Chair of the Asset-Based Lending (ABL) Practice at Winston & Strawn. I also co-chair Winston’s Financial Services Industry Group. I’ve been practicing for 18 years, all in Dallas, and have been an ABL practitioner for my entire career. I settled on a becoming a lawyer once it became clear that I couldn’t earn a living by being really into 80s music, and I really can’t imagine doing anything else.

Perer: How would you describe the lending environment from the lens of the legal profession?

Des Laurier: Notwithstanding some of the political and economic uncertainty that exists in 2024, we continue to see both bank and non-bank ABL lenders actively seeking opportunities to grow their portfolios. We have seen an uptick in direct lender and other non-bank ABL deals for our clients that provide “non-bankable” ABL facilities. ABL workouts seem to be on the rise, but our lending clients have been able to exit relationships fairly unscathed, whether through voluntary sale or liquidation. Federal bankruptcy in the small and middle market space has not been a desirable path for borrowers or lenders given the costs involved.

Klein: Frothy. ABL hasn’t always been sexy, but I’ve always loved it. While other areas of lending seem to ebb and flow, ABL has generally remained consistently busy. More recently, when the leveraged lending market tanked in 2022 and 2023, ABL had two of its best years on record. Things are not letting up in 2024 either. Many of our bank clients have been busy, yet increasingly more selective. For those deals that are deemed “riskier,” many of our non-bank and direct lending clients have been there to take them on. So, the environment has never been more efficient, in my view. Now that interest rates are starting to drop, I am excited to see how the broader lending market will react.

Perer: How has your job evolved as the lending landscape has continued to change?

Des Laurier: As the landscape evolves, our role has expanded to address increasingly diverse collateral types (e.g., intellectual property or digital assets), cross-border transactions and an increasing demand for lending on in-transit inventory. There is an increasing focus on risk mitigation through understanding strong deal structures, financial covenants and which credit agreement terms can and cannot be negotiated. Clients demand that their lawyers understand not only the legal aspects of working through a deal but also their business model and the nuances of their customers’ businesses. Having extensive background in workouts and bankruptcy is a “must-have” in order to navigate the front end of a deal.

Klein: I think that as time has gone by, and new lending products have become more commonplace (e.g., unitranche, enterprise ABL, etc.), I feel like I’ve become incredibly valuable to clients by becoming an expert in a broader range of transactions. The traditional ABL deals have always been and continue to be there, and are a large part of my practice, but as the market’s need for more complex and sophisticated debt products has evolved, innovation has risen to meet it. As Aristotle once said, “Nature abhors a vacuum,” so the rise of these products to fill the market’s needs requires me to be an expert on a larger spectrum of deals than at the beginning of my career.

Perer: Does lending industry consolidation and specialization have an impact on law firms?

Des Laurier: Yes, such consolidation and specialization certainly has had an impact on law firms. As lenders merge and focus on niche markets, law firms have been required to adapt by offering more specialized legal services, often requiring deep expertise in specific areas including industry-specific lending and legal sub-specialties. A law firm’s finance practice must be supported by high quality professionals specializing in other related legal areas, including experts in intellectual property, mergers and acquisitions, tax, agriculture and ERISA.

Klein: That’s a good question. I think the answer is unequivocally, yes. If you are looking at direct lending, there are a handful of firms that really specialize in representing many of the leading direct lenders. That’s where they’ve invested, and that’s mostly what they do. There are also a handful of firms that specialize in middle-market ABL and leveraged finance. Yet another handful of firms specialize in large-cap ABL and leveraged finance. Again, that’s where those firms have invested, and that’s mostly what they do. As the industry has become more consolidated and specialized, law firm expertise in those areas has followed suit. I don’t see anything changing on that front in the near-term.

Perer: How has pressure to close deals faster than in the past changed the legal process?

Des Laurier: The pressure to expedite closings for asset-based lending deals (and maybe all transactions) has required law firms to have a strong group of experienced ABL focused lawyers available to move quickly on new transactions and address deal issues on the fly. We certainly understand that lenders’ lead time for new business is typically many months and sometimes years. The legal process is the last hurdle to clear in order to put points on the board. Law firms need to be equipped to move fast when engaged to run a deal. Clients are looking for their lawyers to be collaborative with borrowers’ counsel in order to get deals completed in a timely fashion while still protecting the lender’s interests. This requires ABL lawyers to focus on material deal points rather than simply “winning points” during a negotiation.

Klein: Ironically, I have found that as a result of the pressure to close deals more quickly than ever, deals (especially in the acquisition finance space) get delayed more often than previously. This is because while legal documentation is usually started at the same time underwriting is commenced, diligence and underwriting issues can be uncovered, which sometimes change the structure of the deal (which takes time to negotiate), and can even cause pencils to go down while the parties figure out how the deal will look, or if there’s a deal at all. Where there are no roadblocks uncovered in underwriting, I don’t think the process has changed much for us at all, because we’re accustomed to giving our clients great legal service on an uber-efficient basis, which is why they continue to work with us.

Perer: What’s your perspective on the proliferation of new products in the ABL market such as First-Out partnerships with private credit and Enterprise ABL lending, among others?

Des Laurier: These new products have allowed ABL lenders to get involved in deals that might not otherwise be an opportunity. ABL lenders need to understand the risks associated with these products and specifically understand how the process will work in a workout or liquidation. Being first out certainly is an attractive structure but may come at the cost of not having a meaningful seat at the table when deals are going through workouts or restructurings. From a legal perspective, these products introduce added complexity, requiring precise structuring of priority agreements, enhanced due diligence, and careful navigation of intercreditor issues to manage risk and ensure compliance.

Klein: I touched on this earlier, but I love that the market has evolved to bring these new products in. It gives borrowers greater flexibility and efficiency when searching for capital in a way that didn’t exist as recently as five years ago. I know that some of my clients have found their ability to partner with private credit to be an absolute game-changer, while some of my other clients can get frustrated that they aren’t able to compete with some of these new products. As far as the market is concerned, though, it’s a great thing to see happening.

Perer: How do up and coming attorneys differentiate themselves these days?

Des Laurier: Young lawyers working in the ABL world can differentiate themselves by truly understanding how the ABL deals are different from general commercial or other transactions. Younger professionals should really understand various cash dominion options, collateral monitoring requirements, collateral risk from both a legal and non-legal perspective and financial covenants. They need to grow both in their understanding of the legal issues but also business issues that are material to the firm’s clients. Developing true relationships with their clients will help young lawyers understand the issues that are more crucial for both the client as well as the individuals working any particular deal on behalf of a client.

Klein: The answer to this question has always been the same, in my view. Number one, be responsive. Be available to your clients. Doing great legal work is table stakes, and if you’re the greatest lawyer in the world, but nobody can get a hold of you in a timely manner, what does it matter? We are in a client-service business. When folks understand that it makes a world of difference in their careers.

Perer: How are your clients dealing with deals in distress?

Des Laurier: Most of our ABL clients are equipped to handle distressed deals without direct involvement from a separate workout group. The interesting part about deal distress is that each deal has its own unique set of facts, circumstances and possible solutions and directions. Asset-based lenders dealing with distressed deals typically focus on protecting their collateral position and maximizing recovery. They may renegotiate loan terms, extend maturities, or offer forbearance to give borrowers time to stabilize while ensuring that their collateral position does not deteriorate.

Klein: Well, it depends on which side of the coin they’re on. If the deals are with a bank, we are seeing them work those deals out, with the most likely outcome being that a non-bank lender refinances the deal. We’ve seen some liquidations and bankruptcies, of course, but by and large, distressed bank deals are being picked up by our non-bank clients, which is great. And of course, if the deals are in distress with a non-bank lender, we are generally seeing those move to a liquidation, a going-concern sale, or to a bankruptcy. Gone are the days where borrowers are easily accessing leverage from their existing lenders on non-working capital assets to enhance liquidity in a distressed situation.

Perer: What are the common themes you are seeing among your deals in distress?

Des Laurier: Common themes among distressed deals include liquidity shortfalls, declining asset values (particularly inventory or receivables), and ownership that is not supportive of the business. Economic factors like supply chain disruptions or market volatility often exacerbate these issues, straining borrower cash flows and asset performance.

Klein: I think most ABL lawyers will tell you that there is still weakness in consumer products and to a lesser extent, retail – and that comports with my experience, too. What I’ve seen recently as well is more distress in oilfield services – which is a bit counterintuitive because of the price of oil. But the common theme across all of these sectors is borrowers over-purchasing inventory at sky-high prices in 2021 and 2022 at a time when the supply chain was disrupted, only to have the market for that inventory erode swiftly and precipitously. Fatigued owners and private equity firms are unwilling to inject additional equity into companies while they wait for their markets to recover. I’d say 80% of my distressed deals are in distress for those very reasons.

Perer: How are borrowers trying to find additional leverage from existing assets within their existing credit facilities?

Des Laurier: Companies continue to try to push advance rates, seek funding on non-working capital assets and include in-transit inventory in the Borrowing Base. Credit insurance is a product that can assist in pushing up advance rates on receivables with the obviously associated increased cost. Lenders continue to evolve and seek advice regarding the risks associated with going outside the traditional domestic receivables and inventory borrowing base model.

Klein: Within existing credit facilities, we are seeing borrowers leveraging real estate and in-transit inventory, with more frequency. In fact, of those categories, we’ve seen a huge uptick in the number of transactions where we are leveraging in-transit inventory. Outside of their existing credit facilities, all of the typical liability management transactions (LMTs) are at play with respect to IP and other assets. I get e-mails every week from colleagues looking to put their heads together for a market check on language that would either permit or prohibit an LMT. ABL is more insulated from LMTs than leveraged deals just by virtue of the traditional ABL structure, but they’re always a concern no matter what.

Perer: What do you predict for the ABL market in 2025?

Des Laurier: As ABL lenders continue to evolve, compete and seek to grow, I believe 2025 will be a busy year in the ABL space. More financial institutions are using their ABL group to provide additional liquidity to companies as well as to work through troubled credits that require enhanced collateral valuations and monitoring.

Klein: I don’t see anything slowing down, frankly. Banks will loosen credit a little bit. Non-bank lenders will continue to take out the distressed deals in banks’ portfolios. I think we’ll also see the proliferation of more partnerships between banks and direct lenders, each of whom is looking to compete with or emulate the Wells Fargo/Centerbridge and PNC/Steel City products. In fact, one of my bank clients will have launched its own direct lending platform by the time this interview is published. I think it will be another great year for ABL and I’m very excited about it.

Perer: What is a perception you have about today’s ABL market that is not widely shared?

Klein: Hard-hitting question here Charlie, but here goes. I think that even though the lowering of interest rates will help thaw out the leveraged lending market, private equity firms will still look to ABL more than in years’ past to facilitate acquisition financing.