As the market grapples with increased restructurings and rising bankruptcy costs, asset-based lenders face significant risks if they fail to understand the true position of their collateral within a timely manner.  Across industries, asset values are declining rapidly.  This necessitates more active and frequent collateral and borrowing-base monitoring.  This article explores the challenges and evolving trends across asset classes and the implications for asset-based lenders. 

Asset Challenges
The volatile nature of asset values in the current market presents a substantial risk to lenders. Appraised values are trending down, reflecting not just increased capital costs and broader economic challenges, but also rapid value erosion resulting from the very decisions lenders make as their borrowers begin to struggle.  This instability demands a more proactive approach from lenders, from forbearances to milestones and everything in between. 

Valuation Considerations Trends in Consumer Goods and Retail: With stubborn inflation and increased interest rates, the consumer is getting squeezed, especially consumers with lower to middle incomes.  These consumers are looking for value, causing retailers to discount aggressively to drive sales and sacrificing margin.  This promotional activity has a negative impact on gross orderly liquidation values (GOLVs), which has a direct correlation to lower net orderly liquidation values (NOLVs). 

During the pandemic, supply chain issues caused a spike in the value of consumer goods, particularly durable assets such as home goods, furniture, exercise equipment, and outdoor goods.  While this had a positive short-term effect on firms’ revenue and profits, and brand value, it ultimately decreased future sales as the long-lasting nature of these products suppressed future demand. 

More recently, we’ve experienced a downturn in the real estate market due to increased interest rates.  Consequently, we’ve observed materially increased inventory levels across the home goods, furniture, and mattress sectors.  These “big ticket” goods are recovering well below historical levels as consumers simply lack the disposable income to purchase these goods, even in going out of business or store closing sales.  Consumers are also carrying record credit card debt with high interest rates, further softening demand across these and other inventory categories.

Direct-to-consumer (DTC) companies, which for years leveraged low-cost capital to market to consumers—some without ever becoming profitable, are now facing materially higher costs and limited capital availability. This financial strain is weighing heavily on DTC businesses, forcing more widespread restructuring and bankruptcy.

The food and grocery sectors, however, continue to perform generally well despite some downward pressure on higher-end brands as consumers trade down to private labels to navigate inflationary pressures.

Consumer Intellectual Property (IP): Prior to and early in the pandemic, we saw new, smaller entrants in the brand acquisition space.  Poor financial performance post-acquisition and rising capital costs caused some entrants to liquidate while others saw liquidity dry up.  Additionally, the largest brand aggregators in the space have been focused on larger and larger acquisitions to drive growth.  Consequently, there are fewer and fewer potential buyers, driving down IP recoveries.

With the continued rise of social media, many new, digitally native “brands” surfaced.  Many of these brands were linked to one or more celebrities or social media influencers and on growth without profitability.  These brands have recovered poorly, especially in distressed circumstances. 

As noted above, the mismatched home goods, furniture, exercise equipment, and outdoor goods supply issues led to increased on-hand inventories and substantial discounts to push products through retail doors. Unexpectedly, this resulted in rapidly decreasing brand value as potential acquirors question when the demand will return.
Despite some headwinds, luxury brands in the consumer goods space with a long history and strong public awareness continued to perform well despite reductions in revenue and profits. Lenders should consider more frequent valuations of luxury IP.

Real Estate Sectors: The office sector is experiencing a TSL FEATURE significant shift due to work-from-home trends leading to oversupply and low demand, which is expected to continue throughout 2025.  Filling vacant spaces and retaining tenants remain challenging with negative rental growth and high overall cap rates persisting.  However, the transition to recovery is expected in 2026 or 2027, with limited supply additions and conversions to alternative uses. 

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