Thoughts on the First Quarter 2020 Asset-Based Lending Index

The Q1 2020 Asset-Based Lending Index reflects a strong market with solid credit quality.  The full impact of the COVID-19 pandemic on the U.S. economy and lending environment is not apparent in the data given the March 31, 2020 cutoff date.  Our expectation is that the Q2 2020 data will be much more revealing and reflective of how the economic shutdown related to COVID-19 is impacting asset-based loan portfolios.

SFNet Confidence Index

The SFNet Confidence Index is based on survey responses from senior executives.  Responses were collected in late April 2020 and focus on anticipated activity or conditions in the forward three-month period.  As seen in the summary below, Bank and Non-Bank Lenders had similar responses this quarter with respect to economic outlook, however, Non-Bank Lenders were more slightly more optimistic regarding how the economic disruption would impact their origination efforts.  The SFNet Confidence Index responses are on a 3-point scale where a response of “1” indicates a decrease/decline, a response of “2” indicates that things are expected to stay the same, and a response of “3” indicates that the expectation is an improvement/increase.

All scores for both Bank and Non-Bank Lenders declined this quarter compared to Q4 2019.  Bank Lenders’ forward outlook for business conditions and portfolio performance dropped materially to an average response of 1.13 and 1.00, respectively.  Both Bank and Non-Bank lenders felt that portfolios will deteriorate in the coming months as the impact of the COVID-19 pandemic begins to appear in bank data.  Bank Lenders expect demand for new business to be stronger with an average response of 2.31.  Portfolio utilization and hiring are expected to remain the same to slightly down.  Non-Bank Lenders’ forward outlook for business conditions and portfolio performance also declined, but less dramatically than that of the Bank Lenders, with an average response of 1.40 and 1.50, respectively.  Similar to Bank Lenders, Non-Bank Lenders believe there will be more demand for new business with an average response of 2.50.  Non-Bank Lenders also expect portfolio utilization and hiring to remain the same to slightly down.    

Commitments, Outstandings, and Utilization

Total Commitments for Bank Lenders were $237.8B for Q1 2020, essentially flat to the prior quarter (-0.1%) and up 7.8% compared to the same period in 2019, indicating a slowing of prior years’ growth trend.  In contrast, Outstandings increased significantly to $121.9B (+24.6% from Q4 2019 and +19.9% from Q1 2019).  Similarly, Utilization (Loans Outstanding as a Percentage of Total Commitments) was up to 51.6% in Q1 2020 compared to 41.4% in Q4 2019.  This was driven primarily by the defensive draws that borrowers began to make in March 2020. 

Total Commitments for Non-Bank Lenders were $2.9B, down 1.8% compared to Q4 2019 and up 15.2% compared to the same period in 2019, reflecting strong growth throughout 2019.  Unlike Bank Lenders, Outstandings were relatively flat compared to year end 2019, but up 6.2% from Q1 2019.  Similar to the Bank market, Utilization (Loans Outstanding as a Percentage of Total Commitments) for Non-Bank Lenders increased quarter over quarter to 56.7%, a strong improvement from 43.7% in Q4 2019.  

Credit Quality

Credit quality remained very strong in Q1 2020 with Bank Gross Write-Offs as a Percentage of Total Outstandings near historic lows at 0.031% for the quarter.  While Gross Write-Offs hovered near historic lows, there was an uptick in Non-Accruing Loans as a Percentage of Total Loans Outstanding as Non-Accruals came in at 0.55% in Q1 2020, the highest level in a single quarter since Q3 2017.  We expect higher Write-Offs in the coming quarters as the impact of the COVID-19 pandemic appears in bank data.  Bank Criticized or Special Mention Loans increased to $4.4B (+13.5% compared to Q4 2019 and +29.8% compared to Q1 2019) though as a percentage of loans outstanding remained relatively flat at 12.2%.  This is still well below the Q3 2017 level of 14.8%.

Conclusion

Overall, Q1 2020 was a solid quarter for the ABL industry as the full impact of the economic slowdown was not evident in the data at March 31, 2020.  We expect to have more visibility in the Q2 2020 report as Banks downgrade risk ratings and Non-Accruing Loans increase.  The magnitude is yet to be determined.  The positive news is that the ABL market is functioning as it has in the past.  There have been significant draw downs and there will be increases in Bank Criticized Loans, but Bank and Non-Bank Lenders believe the ABL lending model will again prove itself.  Bank and Non-Bank Lenders are optimistic that there will be more new business going forward as the ABL market is an important source of capital to businesses in times of economic stress.