Perer:  How would you define a bank versus non-bank First-out ABL structure, and aside from price, what’s the difference between the two?

Bans: When it comes to ABL, most bank ABLs are focused on “cleaner” opportunities. What we have seen with the non-bank ABLs is the flexibility to finance companies in distress with FCCR less than 1.0x, as long as there is sufficient liquidity (either cash on the balance sheet and/or availability under the revolver) to cover the “cash burn” for a specific period of time. Bank ABLs will evaluate the more distressed situations with a keen focus on ensuing that the business plan is attainable, the collateral is bullet-proof, the liquidity is sufficient, and the management team/ownership is capable of managing and executing the turnaround plan.

Zucker: In my experience, the structures are quite similar. The main difference I see tends to be the increased flexibility provided by non-bank first-out players relative to commercial banks.

Fishman: It comes down to flexibility. Given the regulatory environment of banks, they can’t offer the flexibility that non-banks can offer. And, in many instances for a distressed or underperforming borrower, that flexibility justifies the higher cost of capital.

Perer: How do lenders find blue ocean in a world of increasing competition and an increasingly efficient capital markets system?

Garlick: Continuously invest in the best people with the brightest, most creative minds, and have an open-door policy as part of your culture that encourages everyone to share their ideas/opinions. And most importantly, you and your leadership team should take the time to listen to those opinions. Then, try to measure what the market opportunity could be by leveraging those ideas. You can’t implement every idea, but you need to find ways to explore and implement the ones your team believes in the most and then put the ideas into action. And finally, you should highlight these team members who came forward with their ideas and give them recognition in front of their colleagues because they deserve it, and hopefully that fuels more employees to continue coming forward with more ideas.

Zucker: Make things easier for borrowers, both on the way in and during the hold period. We have seen lenders find success by offering multiple or hybrid products that reduce the need for multi-party solutions. For example, ABL lenders providing stretch, true cash flow term loans in house, or unitranche cash flow lenders providing preferred and/or common equity, to account for nearly all of the third-party capital in an independent sponsor transaction.

Fishman: I won’t overcomplicate this answer. Working on the company side, our clients care most about liquidity, cost, covenants and flexibility. To the extent lenders can differentiate themselves across one of those points, it will go a long way. Also, given the tougher credit environment today compared to prior years, lenders that can get comfortable with businesses that are in the process of turning will separate themselves from the pack. We’ve seen some lenders do extended diligence to underwrite these turnaround scenarios.

Bans: First and foremost, we all need to understand that we are in the relationship business, therefore differentiating your organization based upon the people, products and service, is the only way to succeed. Armed with those items, we must then go to market as one bank and demonstrate that we can deliver whatever our clients need leading to growth.

Perer: Have banks finally shifted to a risk-off mode that should benefit the ABL market?

Zucker: I think this is case-specific, bank-specific, and industry specific. That is why we are constantly keeping tabs on so many banks – their priorities and appetites change all the time.

Garlick: If this is true, then it’s not in the markets that Wingspire competes in. There are significantly more banks than non-banks overall, and it only takes one of these banks to show up and closely match our structure. At that point, the prospect compares the cost of capital and overall liquidity being created, and more often than not, they want to see their bank options playout too in order to determine how ‘real’ their offer is.

Fishman: From what we’ve seen, the most noticeable shift in the credit markets has come from enterprise value (EV) underwriting, with additional scrutiny around add-backs and a reduction in the leverage that EV lenders are comfortable with (the latter of which isn’t surprising given the higher interest rates and cash requirements to service the debt). I would expect that this change benefits the ABL market.

Bans: I can often be heard saying that we are all salespeople, regardless of the functional role in originations, underwriting, portfolio, field exam, etc. Conversely, we are also all credit and risk officers, as we work for a large bank. While the goal is to grow, we only do so in a responsible way.

Perer: Has the approach to workouts changed as large-ticket ABL has migrated to an enterprise value product in many cases?

Zucker: We are almost always tasked to explore multiple solutions and structures for clients in workout. So, our approach has not changed too much, but the migration you reference has been a net positive in some situations and a negative in others.

Garlick: Any time that we are evaluating a situation that would entail us providing a term loan that goes beyond the working capital assets, one of the first questions we challenge ourselves with is what the true workout would look like if the business fails to perform. Not just for deals where we may provide a cash flow or IP term loan in conjunction with the revolver, but also when we are lending on M&E and real estate. I don’t know if our behavior has changed based on the types of structures we are looking at. Instead, the biggest change is the third-party costs once these deals go into restructuring or need to file bankruptcy. Third-party costs have skyrocketed over the past few years, and they are absorbing so much of the liquidity that’s essential to these borrowers having success on the other side of the restructuring. In the past, you could execute a structure that had a 10 to 12.5% availability block with the idea that the block will generally cover the third-party costs and help create a buffer on your recovery. I don’t know how true that is anymore with how much these third parties are charging the borrowers.

Fishman: I don’t think the underlying analysis that lenders require to make informed decisions has changed. Lenders still need to understand the strategic alternatives available to them in a work-out scenario. The answer to this question really depends on the collateral available to that lender in each specific circumstance. A lender with an EV loan that’s wildly undercollateralized and who is almost entirely relying on the cash flows of the business for recovery will have a different approach than a lender with an EV loan that’s covered by the assets (or an ABL lender that’s comfortably within the assets). If there is one specific thing to point to, it’s that we are seeing a lot more “test-the-market approaches” to see if a sale or refinance can support the workout.

Bans: Not for Wells Fargo. The mindset is still to serve as advisors to our clients, offering support and guidance, while highlighting the importance of relationships.

Perer: Is there enough supply to meet the pent-up finco demand, especially given there are more new entrants?

Zucker: When I read the press, it seems like the answer is “no.” However, when I talk to lenders, the majority of them have extremely full pipelines, implying a different answer. The real question is whether this abundance of supply is true “qualifying” supply, or if the majority of it is noise and the true supply of deals the fincos can actually transact upon is limited.

Garlick: There is no question that new entrants make it more difficult to sustain prudent growth. But I do believe the best firms in the industry will continue to find ways to evolve and expand the supply of opportunities available to them.

Fishman: I’m always surprised that we still see some new clients who haven’t previously considered the finco market. There’s definitely untapped potential for fincos to go after those “diamonds in the rough!”

Perer: Where are we in this market cycle?

Zucker: It feels like we are early to mid-cycle, as I am looking at 2023 as the start of the current cycle, where lenders started ramping up aggressiveness and lowering spreads.

Garlick: I think it’s too difficult to determine where we are in the cycle right now, and a major reason  is the new administration that’s coming in. What’s going to happen with tariffs? With China? How will these changes impact the dollar, inflation and interest rates? And how many companies are prepared for whatever changes are looming ahead? Additionally, we are all expecting less regulation and a more pro-business environment that should spur an increase in M&A. All of that uncertainty gives every one of us a lot to think about and plan for, especially while we evaluate new business opportunities as well as ongoing portfolio activity/requests.

Fishman: I wish I had the crystal ball to tell me this answer. From everything we’re seeing and hearing from our trusted network and partners, it seems like we’re in for a steady increase in restructuring activity through FY 2025, and our group is prepared internally for that increase in activity. Our team of professionals continues to monitor the market closely and is poised to respond quickly, helping companies and stakeholders simplify complexities and navigate distress.

Bans: While we could delve into topics like interest rates, politics, trade wars, or the current economic environment, the truth is that, as an originator, the market cycle doesn't define us—it works in our favor regardless. In the 1990s, ABL was often seen as a last-resort option, sometimes perceived as a punitive form of credit. However, over time, ABL has evolved into a sophisticated financial product. During challenging times, our products and expertise are tailored to address turnaround and distressed financing situations. In better times, we're actively engaged in financing growth and acquisition opportunities for businesses. The resilience and flexibility of ABL were demonstrated during both the Great Recession and the COVID-19 pandemic. These events underscored ABL as a reliable financing solution to navigate the ups and downs of the market cycle. As the economy reopened post-shutdowns, businesses leveraged ABL credit facilities to adapt to surging customer demand and growth.

Perer: What are the primary market drivers your team focuses on most?

Zucker: We start with the macro –  how does equity view the particular industry and business model – and then go from there. Even if we are raising debt, lenders want to understand enterprise value, equity cushion, and demand drivers for a potential borrower.

Bans: While we stay attentive to broader market trends, our primary focus remains on understanding and addressing the specific needs of businesses at any given time. For instance, back in 2014, I worked with a private equity firm to finance their acquisition of a target in the auto sector using a $75 million ABL alongside a $450 million Term B loan. During the Term B credit committee discussions, concerns about a potential recession were prevalent. One committee member even likened the situation to being in the "8th inning of a baseball game," fearing imminent economic decline. However, as it turned out, there was no recession, and the company thrived for many years thereafter.

Fishman:We tend to focus on both macroeconomic and industry-specific drivers. For example, our Automotive and Industrials team has a specific set of KPIs that they regularly review to get a current pulse on the market, and the same goes for our Retail & Consumer Products team, Engineering & Construction, Aerospace & Defense, and other industry-focused teams. From a broader, macro perspective, we’re closely watching the interest rates environment, the M&A markets, and the overall health of the economy and underlying indicators. We also track public information around debt placement activity, credit metrics, and deal activity. I think our best and most real-time intelligence comes from the informal conversations that we are constantly having with our network across the lending, banking, and legal channels.

Perer: Do you face more competition from banks or non-banks?

Garlick: Far more competition from banks based on the types of transactions/borrowers we prefer to lend to.

Bans: On non-PE owned companies, our competition is primarily large commercial banks. In the PE-owned space, the competition is significantly more diverse, including private credit with unitranche solutions to bank pro-rata structures. As we have talked about earlier, this is where having our own private credit solution through Overland Advantage allows Wells Fargo to offer clients even more options.

Perer: How busy is the turn-around consulting industry given it’s a leading indicator or future ABL deal flow?

Fishman: Our team remains busy and active across sponsor- and lender-driven engagements. As the capital structure levers have tightened over the past 12-18 months, we’re seeing our mandates in the turnaround consulting world revert back to what we do best: identify root causes of underperformance and execute on a plan to return to profitability. Another theme that we’ve seen in the past year or so is an increase in bankruptcy activity, which, at times, is driven by complex or misaligned capital structures.

Zucker: While this is obviously best answered by Dan, I can say that anecdotally, every time I run into or catch up with a turnaround professional these days, they seem extremely busy. Relatedly, the special assets folks at commercial banks and credit funds seem to be busier than they have been in years.

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

Garlick: I believe the supply of ‘good deals’ can be dictated by what the banks are willing to do. This is because of how the banks have been willing to structure their deals, primarily around advance rates, but also around the size of their stretch term loans they are willing to provide. I believe there is only one way to navigate around these banks, and that is by making sure we have the best talent that fits our company’s culture and by continuously reinsuring our organization that we are going to fight and win these battles in the trenches together.

Zucker: I find ABL lenders like the organizations Bobby and James represent to be quite dynamic and creative. Conventional wisdom may say that ABL is a commodity – a company has assets equaling X and can borrow an amount equaling Y percent of those assets. There is so much more to the story and many folks would be amazed at how different the inputs and outputs actually end up depending on the lender and situation.

Fishman: I personally think we’ll see an increase in liquidations and distressed M&A activity in FY 2025, specifically across companies that have been in workout or on the “watch list” for some time. From talking to various lenders, I get the sense that patience is starting to wear thin, and, given the more challenging debt capital markets environment, there will inevitably be a push to monetize collateral through other means.

Bans: While it’s not a perception that isn’t widely shared, I do believe that AI and technology are going to have sweeping effects to how we do business over the next five to ten years. Having been in lending since the late 1990’s, the biggest change I see is that we print less (no more huge credit committee folders) and a substantial part of our communication is done via email and video calls. Technology over the next several years will focus to create the ability to reduce operating expenses, increase speed and accuracy of transactions, and provide for the ability to have real-time data and information.