Asset-based lenders are feeling good − certainly much better than six or nine months ago. After a rather slow start to the year − when market turbulence gave way to liquidity constraints, in turn raising questions about who was around to lend − some semblance of tranquility has returned to the capital markets. The relative calm has lenders taking another look at their balance sheets and budgets, and reexamining returns. Larger pockets of liquidity have emerged and lenders are looking to book more assets, and often up tier.

“Everyone is pitching now,” says one source. “Liquidity is so much better because banks are feeling better and coming back to the market.” Indeed, asset-based arrangers say they are getting more reverse inquiries on deals and “no one is letting paper go.” In addition to the expanding universe of investors lending once more – many are taking larger credit slugs. It bears repeating that the asset-based lending (ABL) market did not shut down like the broader leveraged loan market did in late 2008 and early 2009. At roughly $10.3 billion, 2Q09 ABL issuance was modestly down from 1Q09 levels ($11.2 billion) and off a more significant 30% compared to year-ago levels.

Still, at $21.5 billion, total asset-based lending for the first half of this year was down only a modest 12% compared to 1H08. In contrast, the broader leveraged loan market saw issuance drop almost 36% in the first six months compared to 1H08. More notably, asset-based lending represented 22% of total leveraged loan activity in 1H09, up from year-end 2008 levels of 14%.

The traditional underpinnings of ABL as a counter cyclical capital markets product obviously helped keep the market open. After all, there were plenty of refinancings to be had as market conditions gave rise to corporate deleveraging and restructurings. Over $14 billion of total ABL issuance (66%) in 1H09 represented refinancings and/or restructurings of existing corporate credits.

Return of ABL/HY bond combo
At the same time, the resurgent high yield bond market lent support to ABL efforts in two fundamental ways. First, cash loans that were refinanced and/or downsized via the bond market freed up liquidity – ultimately allowing lenders to funnel cash back into the system via new loans. Secondly, issuers’ access to the high yield bond market enabled the return of straightforward ABL and high yield bond financing combinations. A far cry from the multi-tiered event-driven deals from 2006 and 2007, the two-pronged ABL-bond financing structure provided a solution to liquidity constrained issuers – albeit on a selective basis. In late June, Smithfield Foods raised $625 million in the high yield bond market to pay down existing debt. This came in conjunction with plans to raise a $1 billion ABL revolver, which replaced its existing revolving credit.

Taking advantage of an open bond market, a number of issuers that did not close their syndicated ABL tranches in 2008, because they were unable to get the linked high yield bond component done, re-launched their deals in 2009. In August, Affinia Group completed a $225 million senior secured note offering as well as a new $315 million ABL revolver. Proceeds will be used to repay outstandings under existing credit and trade account receivables facilities. An earlier effort to raise $200 million in senior secured notes was derailed during the market meltdown last September. The $340 million ABL facility, which was successfully syndicated in conjunction with the anticipated bond offering, ultimately did not close as a result.

Similarly in July, American Commercial Lines amended its existing ABL credit, via a $390 million, four-year facility that was complimented by a $200 million high yield bond issue. The original deal from 2008 was likewise syndicated but did not close since the corresponding high yield bond component failed to get done in the market.

Developing a taste for looser investment criteria?
The successful execution of the American Commercial deal also highlighted the fact that the market is breathing more easily when it comes to pushing better-quality credits through market. This is particularly true in light of the shifting supply/demand dynamic in which lenders are now increasingly vying for limited assets. “Sponsors are asking for more, playing the relationship card,” says one arranger. “They shop you against each other.” The result? In the case of American Commercial, the company secured financing with a four-year tenor (in what is still largely a three or 3.5-year market), and the absence of an applicable Libor floor. “You can’t take a ‘take it or leave it’ approach,” says one lender.

As the market normalizes, it follows that the application of lender-friendly tools will be less rigorous as arrangers compete for deals. In turn, “there is a little bit of loosening in the strategic mantra among lenders looking to invest. If there were four or five criteria that had to be hit [in order to commit to a deal], there may now only be three and that is on a case by case basis,” explains another source. Lenders concede that while Libor floors are relevant among larger deals and more troubled credits, by and large they have not had to use them on smaller, better-quality names. It follows, therefore, that Smurfit-Stone Containers’ $750 million DIP financing from January included provisions for a 3.5% floor. The same was true for comparable deals for LyondellBasell Industries (3% floor) and Quebecor World Inc., which launched a $675 million exit financing that included a $350 million, three-year ABL revolver priced at LIB+450 with a 3% floor.

At the larger end of the market, Toys R Us added a 1.5% Libor floor to the terms of its amended $2 billion ABL revolver from May. The new credit pushed out the maturity on the existing credit two years and did away with a FILO tranche (still a non-starter in today’s market). Lenders concede that there has been limited upward spread pressure on recent deals. Instead, there has been a leveling off with spreads hovering in the range of LIB+400 for deals of size and south of that for smaller, relationship-based credits (largely in the range of LIB+350). Upfront fees are at 100 bps with new multi-year credits higher than that (depending on the deal) and smaller, middle market credits occasionally in the range of 75 bps or even 50 bps. However, sources point out that pricing at the smaller end of the market has “always been an anomaly.” By the end of 2Q09, average spreads on ABL deals of at least $75 million were just over 406 bps.

Although the market is succumbing to some level of increased competition, lenders are highly sensitive to deals that may drive the market down – particularly when there is still not a comfortable sense of market capacity. “There are significant players out of the market,” says one lender, either due to consolidation, exit or change in strategy. Others, sources say, “want to lead but not play and the smaller regionals can be very picky.” An amend and extend for RSC Holding Inc., for example, while successfully clearing the market in July, did raise the ire of several lenders. The deal – like many 2006 and 2007 LBO financings with 2-3 years left on the credit − attempted to push out the tenor on its existing $1.1 billion revolving credit from 2011 to 2013. The credit initially hit the market with drawn spreads of LIB+350. But it required a 25 bps price flex and locked in $819 million in commitments to extend the maturity. In the process, the deal signaled that the market was not ready for a significant pricing down draught.

“Even if it is a sweetheart borrower in the equipment rental business,” says one lender, “it does not mean that they deserve to be 25 or 50 bps lighter” in today’s market. Adds another lender: “It is easier to syndicate at LIB+400, and [very little] has changed economically or even for the companies. But there is competition and lenders want to lock up a big ticket or a big role – particularly if there is a bond component.”

Clubbed deals drive issuance
Rail America completed a $40 million ABL deal with a $740 million complimentary bond piece in late June. The financing was done with four bookrunners who took pro rata shares in both the loan and bond deals. Unsurprisingly, the general consensus is that if there are other revenue generating opportunities out there, arrangers will club up. Moreover, this type of deal sharing, say lenders, is key to getting credits through market – at least until the capacity issue is cleared up.

It may also be a key ingredient to launching more event-driven financing. Most recently, Barnes & Noble Inc. secured a $1 billion, four-year ABL revolver that will back the company’s acquisition of Barnes & Noble College Booksellers Inc. Three banks committed to provide up to $600 million under the new credit and the deal was briskly circled to secure an additional $400 million. How did this all come together? Barnes & Noble is an asset intensive name that made a seamless shift from a cash flow to ABL structure. More importantly, given the fact that the deal involved M&A financing, it needed to be “underwritten.” The clubbed ABL structure bypassed any need to hit the institutional market. Ultimately, although the ABL market is on more solid footing, no one is taking any structure for granted. Tenor, for example, has come in from the five-year deals structured prior to the 2008 market meltdown to three-year tenors dominating today’s market.

Nonetheless, 3.5-year credits have gained ground and even four-year credits – including recent deals for C&S Wholesale Grocers, Skechers, and Affinia – have worked their way through market. But there are caveats: Longer tenors are only applicable to stronger, well-priced credits. “It is still not a deep market for a tough credit,” says one lender. “You still can’t do a big, big deal for a tough, tough credit. But [earlier this year] you could only do $100-$150 million deals for tough credits, and now you can probably do $500 million.”

The market can expect more deals to work their way into the pipeline. The Liz Claiborne financing that was done this year matures in 2011, but may be refinanced before that. And Bon Ton’s acquisition financing from 2006 faces a refinancing cliff in 2011 and will probably need to do away with its current FILO tranche. Incremental liquidity (new money) for most issuers is still not a given in today’s market.


Maria Dikeos is Vice President - Senior Market Analyst with Thomson Reuters LPC in New York.