Thoughts on the First Quarter 2019 Asset-Based Lending Index

As we take our first look at Q1 2019 results, please note that we have made a significant change to the reporting methodology in 2019. We have drawn a line in the sand and are splitting the ABL lender universe along Bank and Non-Bank lines, as opposed to our previous methodology of splitting up the ABL lender universe by size.  Yes, size does matter, but we feel that this new way of slicing the data is more meaningful to our members and potentially more representative of the different ABL market segments.

If we were to represent Q1 2019 as one of those office motivational posters, “Little by little, a little becomes a lot” would be appropriate.  While there were some interesting observations, which will be discussed later in this article, taken as a whole, there weren’t any huge shifts in the metrics presented in the report. Rather, the numbers suggest that the ABL industry continues to grow at a steady pace.

Growth in Commitments and Outstandings

Total Commitments for Bank Lenders was $232.0B for Q1 2019, up very slightly over the prior quarter and the same period in the prior year (0.4% and 1.3% higher, respectively).  While Commitments were only up slightly, there was a greater difference in Outstandings, which is a continuation of a higher utilization trend seen over the past few quarters.  Outstandings for Bank Lenders was $106.9B in Q1 2019, compared to $100.0B in Q4 2018 and $98.5B in Q1 2018, an increase of 6.9% and 8.5% respectively.  For Non-Bank Lenders, the general trends were the same but with higher growth in commitments at 4.1% growth quarter over quarter and 4.5% growth year over year to $4.6B in Q1 2019.  Outstandings also grew significantly quarter over quarter by 8.9% to $2.1B, mirroring a spike in reported Utilization (Loans Outstanding as a Percent of Total Commitments) by Non-Bank Lenders where Utilization was 56.4% in Q1 2019 compared to 50.9% in Q4 2018.

As this is the first quarter we are reporting quarterly information along Bank and Non-Bank Lines, it’s worth noting that the relative sizes of the two groups somewhat align with the results of the 2019 Secured Finance Market Sizing & Impact Study recently completed by the Secured Finance Network Foundation; it suggests that the Non-Bank segment represents 8.2% of Total Commitments.  The Non-Bank universe is more disparate and may have participants that enter and leave the market, making ongoing tracking more difficult and thus potentially understated in this first attempt by our organization to capture the information on a quarterly basis.

Economic Growth

While the current economic cycle of growth has been a long one, Q1 2019 continued to exhibit more of the same. First quarter GDP grew 3.1% according to the third estimate from the Bureau of Economic Analysis released on June 27, 2019.   According to the report “the acceleration in Real GDP in the first quarter reflected an upturn in state and local government spending and accelerations in private inventory investment and in exports.”  The report also noted a decrease in imports in Q1 2019 (which are a subtraction in the calculation of GDP).  

While GDP has been positive, the report notes that Corporate Profits (Corporate profits with inventory valuation and capital consumption adjustments) decreased $59.3B in Q1 2019 quarter over quarter (-2.6%), following a decrease of $9.7B in Q4 2018 quarter over quarter (-0.4%).  This is a fairly sharp contrast to the past few quarters.  For reference, Q3 2018 exhibited 3.5% growth in Corporate Profits and Q2 2018 exhibited 3.0% growth, all on a sequential quarter over quarter basis.  While hard to quantify, it seems that based on anecdotal evidence and casual conversation with industry participants, that people have been waiting for some time for some sign of a slowdown.  The drop in Corporate profits over the past two quarters is probably not a reason to ring the alarm bells but is an interesting development nonetheless and something to watch.

Line Utilization

The drop in Corporate Profits in Q1 2019 and Q4 2018 noted above were accompanied by general dysfunction in the broader credit markets during that period.  The dysfunctionality in Q4/Q1 affected a number of sub-markets but in general, the ABL segment remained wide open with companies able to efficiently access capital through ABL facilities.  The historic high level of Utilization (Loans Outstanding as a Percent of Total Commitments) in the Bank segment of 46.3% may be a reflection of the market dynamics whereby companies drew down on ABL facilities as a source of liquidity as other markets became challenging.  The trend of utilization growth over the past few quarters, absent any unforeseen changes or market dysfunction, is expected to plateau and perhaps decline in the next few quarters.  The marked Utilization increase in the Non-Bank segment in Q1 was significant at over 5% quarter over quarter, but is unlikely to be related to the dysfunction in the credit markets as the smaller companies serviced by Non-Bank providers generally do not have access to a broad range of credit products.

Credit Quality

Credit quality remains very strong in Q1 2019.  Bank Gross Write-Offs as a % of Total Outstandings and Non-Accruing Loans hovered at near historic lows of 0.022% and 0.43%, respectively, which is consistent with the past few quarters.  Similarly, Bank Criticized or Special Mention Loans continued to trend downward at 11.4% of Total Loans Outstanding, which is down relative to the prior quarter (12.2%) and same period in the prior year (14.5%).

Secured Lending Index

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The Secured Lending Confidence Index (SLCI), sponsored by the Secured Finance Network Foundation, is a qualitative forward-looking view of the market based on five questions which deal with the next three months as opposed to our standard quarterly reporting, which reports actual historical results.  It is our view that it is important to look at trends in the responses and how they have changed over time.  The responses are on a 3- point scale where a response of “1” indicated a decrease/decline, a response of “2” indicated that things are expected to stay the same and a response of “3” indicates that the expectation is an improvement/increase.

What we have noted in Q1 2019 is that overall, sentiment remains positive, but at levels which are less positive than prior quarters.  The responses have generally declined from somewhere between 2 and 3 on the aforementioned scale to something closer to 2. Going back 6 quarters, the items with the largest declines are the demand for new business and overall business conditions.  That said, there are no indicators which have dipped below an average score of “2” which would indicate an expectation of a decrease/decline in the next 3 months.  It is likely that concerns about the broader economy are impacting the Confidence Index results as industry executives go into wait-and-see mode.

Conclusion

Our industry continues to grow with trends reflecting the same pattern as seen in the past few quarters.  Not only has credit quality remained very strong, but there is continued growth in Total Commitments.  Utilization also remains an interesting metric to watch in the coming quarters along with broader economic indicators and dynamics.  Overall, Q1 2019 was a solid quarter for the ABL industry. Although there was some level of dysfunction in the credit markets in Q1 2019 and Q4 2018, the Industry was amply able to provide companies with the necessary capital and seems to continue to do so regardless of the said dysfunction’s impact on other sub-markets.

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If you find our industry analysis helpful, we strongly encourage you to participate in future surveys if you are not already doing so.  We try to provide meaningful reporting but having participation from all of our lender members will ensure that we provide the best industry information possible. Please contact Aydan Savaser at asavaser@sfnet.com for more information.