CIT Executive Sees Economy Driving Asset-Based Financing Trend

CIT's Jonathan Lucas

HFN
December 3, 2001

From a lender's perspective, what changes have you seen in the home furnishings industry?

Over the past eighteen months, we have seen a marked increase in the number of home furnishings companies turning to asset-based financing.

What is prompting this movement?

Much of this is a reflection of the current economy and the existing retail environment which has caused a decline in the financial performance of some companies. As a result, many companies are not in compliance with loan covenants and no longer qualify for unsecured loans. Borrowers are restructuring their loans, and are realizing that asset-based lending is a viable alternative and, in some cases, results in increased borrowing capacity.

Do you see this continuing?

Yes. Although many companies use asset-based lending all the time, the pressures generated by the current recession are making scores of companies that were former bank borrowers turn to asset-based lending too.

What is the difference between an asset-based loan and an unsecured or bank loan?

Asset-based lending is financing that is secured by assets of determinable value, typically trade receivables, inventory or equipment. Tapping this balance-sheet based approach, lenders can often find a level of comfort to make loans to companies with unsteady cash flow or losses.

By comparison, a loan from a commercial bank is typically based on cash flow. In the present environment of earnings deterioration, many companies can no longer adhere to the financial covenants of traditional bank loans.

What does an asset-based lender look for?

"Give me a viable business plan and good collateral and we can probably do the deal."

Cash-flow lenders typically avoid companies with negative cash flow, historical or projected losses, or industries in a downturn. Asset-based lenders look beyond these characteristics to the underlying value of the borrower's collateral.

How are asset-based loans priced?

I can only speak for CIT, but our rates and fees are competitive with rates charged by the major banks. Our pricing has to be competitive in order for us to retain our clients and win new business.

Is asset-based lending a temporary solution?

No, not necessarily. Even though asset-based lending may seem new to some borrowers, a number of our clients have been with us for 10, 15 and 20 years. We support companies through all stages of the business cycle. Our loan criteria and credit analysis is consistent in good times and in bad.

What challenges are lenders facing in this environment?

In many industries, the collateral values of inventory, receivables and machinery & equipment - the core collateral for most asset-based deals - are not sufficient to cover loan demands. Values of certain assets can change drastically, and therefore have to be continually re-appraised. Asset-based lenders are increasingly being asked to lend against less liquid assets such as intellectual property and trademarks. In the case of rapidly deteriorating credits, there may not be sufficient asset coverage to warrant a loan commitment.

Jonathan Lucas is Senior Vice President for CIT Commercial Services. He has 20 years experience structuring financing solutions for companies of all sizes. He may be reached at (212) 382-7225.