Back to Basics – Understanding True ABL Structure and Processes

The Credit Risk Management Audio Conference Series kicked off 2015 with an in-depth look at ABL structure and processes in today's marketplace. Jim Cooper, Managing Director, Risk Management, SunTrust Bank, and Barry Fife, Senior Credit Officer, Associated Bank NA discussed concerns in this area as some banks view ABL as a new market for growth and seek to grow loan volume and fee revenue at the expense of prudent ABL lending practices.

Cooper began with a brief history of ABL recalling that it was considered "last chance finance" in the 1970s and 80s, mainly serving as a product for companies with no cash flow, or whose cash flow was too volatile for any other lending options. Consolidation of many banks in the 80s and early 90s brought ABL mainstream to corporate America, as larger banks had access to more capital to make bigger loans.

After the financial crisis in 2008, as the banking market dried up, ABL lending was still open as a product for banking and liquidity. Banks reassessing their loan portfolios and seeking to diversify looked to ABL as a viable option, with few knowing what was involved. As a result, long-tested methodologies have been taking a hit and a need for a back-to-basics approach to ABL lending has emerged.

Although ABL has morphed over the past 25 years, at its essence, it is virtually the same. Cooper identified several guiding principles of true ABL:

1) The first, and most important, principle is that ABL is a disciplined set of processes that ensures collateral is a viable repayment source;
2) The first question a bank should ask is how will it collect on the collateral assets and what will be the exit strategy? It is key to think about the liquidation before the bank funds the loan;
3) ABL is an experience-based credit product. Professionals learn through liquidation and experience in asset-based lending is essential. Cooper stated there is a shortage of this experience in the marketplace today.

Fife added that what differentiates a true ABL shop is the daily monitoring of cash receivables activity through the bank's lock box, determining the quality of the inventory through appraisals, and always having a clear understanding of how well the shop can liquidate. Join us for the next offering in the Credit Risk Management Audio Conference Series on Tuesday, February 10, 2015, Construction Lending Risk Management Strategies.

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