Maria Dikeos
Welcome to the Lending Lowdown. I'm Maria Dikeos, Head of Global Loans Contributions at LSEG.
Asset-based lending has become a very conspicuous discussion point for direct lenders in today's market. There's a lot of commentary in the direct lending community about the role of asset-based lending in strengthening portfolios, or differentiating between alpha portfolios versus beta portfolios in the market. What does this all mean? It's not clear that there's an agreed upon taxonomy when it comes to talking about asset-based lending in the direct lending space.
Especially when the term is endemic to traditional ABL lending in the bank loan market. Helping us provide some clarity and sharing his perspective about the differences, similarities and use cases of ABL lending among traditional bank lenders and increasingly direct lenders, is Barry Bobrow, Head of Credit Markets for Regions Business Capital. Barry is very well known in the asset-based lending world, having served as head of asset-based syndication at both Bank of America and Wells Fargo prior to taking his current role at Regions in 2022, Barry is the founder and chairman of Asset Based Capital, a leading conference on asset-based lending, now in its 18th year. And he has a long history of involvement with the primary trade association for asset-based lending, the Secured Finance Network, and serves on the Management Committee as immediate past president. So to start, Barry, for listeners who are less familiar with asset-based lending generally, can you lay out for us what a traditional ABL loan is and what features or terms are critical to an ABL loan construct in the bank loan market?
Barry Bobrow
Absolutely and first Maria, thank you so much for having me as your guest today. You and LSEG have been incredibly important supporters and partners to the asset-based lending market for many years and I have always appreciated your personal contributions on the data side of our market and how you're able to integrate it into your broader market coverage.
Your work has been a big contributor to the growth of asset-based lending over the last 20 plus years that we've been working together on it, so thank you and thanks for having me. I really like your use of the word taxonomy. It seems like we're starting to have a much bigger conversation around terminology, so probably, probably the right place to start.
Asset-based loans are a subset of the broader category of leveraged lending, so let's get that out there. Leveraged loans are almost always secured and that security places the loans ahead of the unsecured creditors in any kind of workout or liquidation. Which has a significant impact on how the loans perform in distress situations regardless of the type or the extent of the collateral. But just being secured doesn't make it an asset-based loan in my mind. When I think about asset-based lending, I'm talking about a subset of secured lending whereby the loans are intentionally structured. Such that the funded amount of the loan at any point in time is intended to stay within the liquidation value of the collateral that underlies them. And while the default risk of asset-based loans may be very similar to leveraged loans overall, if done what I would call the right way, asset-based loans have a very low loss rate, a high recovery rate, relative to the broader category of leveraged lending. That that's what allows lenders to provide capital to borrowers that might not otherwise be able to efficiently access that critical funding. But it's it's actually much more of an art than a science. Definitionally, there's actually a great definition, Maria, for asset-based lending that you and I remember along with a group of industry professionals developed in around 2003 to help facilitate the introduction of what you guys did, the asset-based lending league table.
It's all, on your website, but essentially what it says is that asset-based loans are primarily working capital based financings that are monitored and administered in a particular very specific way, which includes some sort of borrowing based formula and also the ability to control the cash of a borrower under certain circumstances. And that definition is consistent with how I look at the industry. It's also generally consistent with the way that the members of our trade association, the Secured Finance Network, define their businesses. So for taxonomy purposes, let's call that traditional asset-based lending.
There's two core competencies that I would say are essential to traditional asset-based lending and these are what differentiate this asset class from other lending markets. They're what results in the low loss experience of asset-based lending. The first is the ability to determine asset values in a worst case scenario. The second is knowing how to structure and monitor the loan to give the lender levers to pull if things don't go as planned and to try to assure that the loan balance stays within the value of the assets, all of which are moving targets and I don't have time today to get into the deep details of exactly how those competencies are at work, but they're based on a lot of years of trial and error and experience and they're both very dynamic. They change in differing market conditions overtime, asset values move all the time, there's changes in the legal and regulatory environment that impact the rights and responsibilities of lenders and also there's a skill developed overtime of lenders, how to manage loans and that's also a very dynamic scenario as well. So all those are moving targets, but those are the two competencies.
And I think it's important to emphasize that in this definition of traditional asset-based lending, the loans are primarily working capital revolvers. They consist of a borrowing base with formulas. Keep that in mind when we start talking about the other things that we're that we're also being are being referred to today as asset-based loans.
One more, one more point, Maria, because working capital receivables and inventory are more easily assessed and monitored than other types of assets, I think asset-based lending works particularly well and can be most relevant in working capital intensive businesses. So as your own data shows, the industry is heavily concentrated. In industries like retail, commodity intensive industries like metals and chemicals, a wide range of manufacturing related businesses and various types of distribution businesses, it's also found some footing in other sectors like healthcare, energy and technology more on the hardware side. The asset-based lending market will provide advances against fixed assets and occasionally intangibles and sometimes we get into cash flow lending pieces called an over advance. But all of that is based on the idea that the majority of the loan is a working capital based financing.
The methodology and approach of to loan management of traditional asset-based lenders is not infallible, but over time it's proven to be a way of making loans to companies that are below investment grade in quality and often experience seasonal and secular risk issues that can make cash flow loans to these companies very challenging.
Maria Dikeos
Thank you so much, Barry. Really helpful and very thorough. Against that backdrop, what is your best guesstimate of the total size of the asset-based loan market? And when I ask this, I'm thinking about large corporate commitments of course but also smaller commitments to middle market issuers, et cetera.
Barry Bobrow
Luckily, I don't have to guess too much. The Trade Association, and you've been helpful in this as well, have done several iterations of a market sizing study starting in 2018. We make heavy use of LSEG's tracking on the syndicated market which is really good data and then we also have SF Net proprietary member data and by our surveys and also we make some estimates as best we can on the non-syndicated portion of the market. And the most recent study available estimates total asset-based loans market at around 542 billion in commitments at the end of 2024 of which just under 400 billion was out there at in the at the end of 2018. So a lot of growth from 2018 to 2024. Some of that's methodological and but there has been steady growth in the overall industry since 2018 when we first started tracking it. And while the industry provides credit to both large and small companies, as you point out, the overwhelming majority of the dollars consist of large syndicated asset-based loans.
Your data at LSEG as of year end 2024, there were actually 95 active asset-based borrowers loans at a billion or more with the largest at just over 5 billion. These loans represent over 178 billion in loan commitments and I have to point out that these same large borrowers are active in other markets as well. They have over 200 billion in related debt consisting of bonds, institutional term loans and private credit. So for these larger borrowers, the amount of the related debt is a very key feature of the market, why the lenders are involved in it, how the loans are structured, et cetera. It's not to say that the that there aren't lots of small asset-based loans. There are, but the size of the large loans just overwhelms it from a data standpoint.
According to the most recent SF Net survey of the 542 billion in commitments, all but 30 billion are made by banks and this is a very key point to our discussion today. The balance are made by the 30 billion are non bank asset based lenders. They're very active but due to differences in cost of funds and leverage, they are most competitive in making loans that are more challenging to banks from a risk and regulatory standpoint. The valuation and monitoring techniques, the core competencies are the same for these non-bank asset-based lenders, but they're willing to take on companies and loans that are that are more challenging for banks.
SF Net also tracks the utilization of loans via quarterly survey and the most recent results show the utilization rate at around 40%. So if you do the math on that, total loans outstanding, not commitments, but outstanding at the end of 24, around 216 billion.
Maria Dikeos
Great. Thank you so much, Barry. Just following up on all of this, what would you identify as sort of the core differences between a traditional ABL loan and what's being called an asset-based loan in the direct lending market?
Barry Bobrow
Today's conversation, we don't have time to get into what is really a stunning story about the growth and development of the direct lending market, but the growth and capacity of this market have made it both a competitor and a partner to banks over time. But nearly all of the private credit is secured loans. It's not surprising to me that portions of that market have taken on some of the characteristics of asset-based lending. One important distinction between asset-based lending and other types of loans where private credit has become so important is that as the SF Net market sizing study shows, the vast majority of traditional asset-based loans are loans that banks are very comfortable making and there's really been no migration away from banks to non banks in traditional asset-based lending. The percentage hasn't changed in the time that we've been doing the survey. The cost of funds and leverage characteristics, as I said, mean banks.
If banks are interested in a loan, it's challenging for a non-bank to compete for it. I don't want to talk about the broader credit market, private credit, direct lending market, but what I want to focus on is what you what you're talking about the part that's now called asset-based lending.
I would break it into 3 broad categories. The first is the traditional asset-based lending defined and measured by the study at around 30 billion. These lenders are utilizing the same methodology and they look just like what the banks are doing. That's traditional asset-based lending. It just happens to be by private credit.
This market is growing, but it's growing in line with the overall asset-based market as far as we can tell.
The next category that I would include in direct lending it's loans that are being provided by a very specialized group of direct lenders who are where they stretch on the typical bank advance rates and include some collateral types that that bank lenders don't favor. These are sometimes referred to as first in, last out or filo loans. They're typically done in tandem with alongside of a traditional asset-based loan that's being provided generally by banks and it's typically in some sort of unit ranch structure where it's all part of one agreement that there's the stretch advances held by a different group of lenders and in exchange for premium pricing, these lenders, they're stretching the boundaries of assets and advance rates and relying on their ability to value those assets and manage losses via the administration of the loans in an integrated way with the asset based loan. This isn't a huge asset category. I don't have numbers but it's likely smaller than what I'm tracking on the on the non asset-based lending tracked by SF Net, but it often amounts to a sizable loan in the capital structure of any company that's using it if they're going through transition or distress, it's been prevalent in M and A transactions as an alternative to cash flow based institutional term loans.
And the third category that what that's being referred to as asset-based lending and it's the biggest one. It's very difficult to estimate, but in this format, the underlying collateral is non-traditional asset categories such as consumer receivables, rolling stock, leases, IP, real estate, mortgages, anything. These can be structured as a loan or via a special purpose vehicle, but they're generally not working capital financings. They're typically a term loan, not a revolver. Increasingly, these transactions are being done as a way for banks to reduce their exposure to assets they find unattractive from either a risk or return standpoint.
And the growth appears to be very rapid based on just the level of fundraising we hear about specifically for this purpose. The main point I want to make about this asset category is that while the risk return characteristics of these asset-based loans may be favorable relative to cash flow lending and the rest of private credit, it should be very different from traditional asset-based lending due to the different collateral types, structures and monitoring.
Maria Dikeos
The assets just are a bit more esoteric at a higher level. Again, with all of this, where do traditional bank led ABL loans make sense and where do you feel that private credit constructs make sense?
Barry Bobrow
Understand Maria, I've been in this industry for so long I'm completely biased. But for companies that are working capital intensive and where the borrowing base assets provide a significant portion of the financing need, I I just believe the best solution is generally a traditional asset based loan provided by banks or non banks.
If the total debt need to the company is significantly greater than what can be financed by the assets, which is very often the case, then the asset based loan can easily be combined with a high yield bond, an institutional term loan or private credit. That capital structure leaves a company with very attractive all in cost of financing, relatively flexible documentation and gives them the ability to run their business throughout a business cycle. So whether to use public or private credit in these in these capital structures is a function of a number of factors including the size of the overall need market conditions. I don't need to get into that today, but I think I think the asset-based loan, the traditional is a great, is a great companion to other kinds of debt in situations where there's a lot of working capital.
Maria Dikeos
Before we we wrap up, just to kind of summarize what we've talked about today in terms of structure considerations around when it makes sense to think through asset-based loans, whether they're arranged by banks or direct lenders. For the rest of the year and then into 2026, what are you keeping an eye on?
Barry Bobrow
Well, I should be asking you that question, you're the you're the market analyst. But my for my two cents, I think the second-half of 25 looks a lot like the first half, still muted M and A activity driven by continued uncertainty over direction of the economy. There have been exceptions to that and I suspect that there will be some M and A activity driven by companies looking to better position themselves for the changes driven by whatever happens with tariffs. The major driver of activity in the asset-based market so far and for the remainder of the year and I would suspect into next year, will continue to be the significant maturity wall in the asset-based market. It's not a problem, it's just a fact that there were a significant amount of deals done in 21 and 22 with five year maturities that are all maturing in the remainder of 25, 26 and 27. Those maturities need to be addressed and they will be and we're seeing a good uptick in refinancing activity, conditions are favorable, banks are eager to lend. So I suspect that that will be the key driver for the remainder of the year and into next year.
Maria Dikeos
Wonderful insight as always, Barry. Thank you once again. I invite you to check out our ABL news, data and analysis at loanconnector.com. I’m Maria Dikeos, please subscribe to Lending Lowdown on your favorite podcast platform.
