Industry Perspective
Asset-based Financing

(TMA International Headquarters)

Following is an interview with Drew Neidorf, President of CIT/Credit Finance, an asset-based lending company. Mr. Neidorf has been with CIT for over 15 years. He spent his first seven years as a field examiner, Account Executive and Director of Marketing. He became Ex­ecutive Vice President of the company and then President. He holds a BS in Accounting from Syracuse University.

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Q: How bad does a credit have to be so that even an asset-based lender won’t touch it?

A: A number of factors working to­gether would cause us to have to turn down a borrower. The qual­ity of management is always very important to us. After careful evaluation, if we perceive man­agement to be inept-that would be a very strong negative. Addi­tional factors that cause us to exercise extreme caution are a collateral short fall, poor condi­tion of a company’s books and records, and imminent liquida­tion. We always make decisions on a case-by-case basis-but these are the red flags.

Q: Many have observed that asset­-based lenders tend to rely on the value of their collateral rather than engaging in recommending turnaround managers and con­sultants. Do you see this ten­dency changing?

A: Collateral has been, is and always will be, our first consideration. However, a good turnaround management company or con­sultant could solve the problems I mentioned that raise red flags for asset-based lenders. When we see viable solutions to these problems being put in place, we are much more willing to pro­ceed.

Q: Which type of assets do you be­lieve are the most difficult to fi­nance?

A: Inventory is the most difficult type of asset to finance because inventory can disappear, become obsolete, or age in ways that erode its value. This is not to say that we don’t finance based on inven­tory. We do. In fact, about a third of our asset-based loans are in­ventory-backed.

Q: Do you foresee any near-term shifts in the ability to finance real estate?

A: We have tended to stay away from real-estate-backed lending. Historically we have only done a small amount of real estate fi­nancing—so our philosophy hasn’t changed with the recent problems in the commercial real estate area. However, with de­creased real estate values, recent write-offs by banks, and envi­ronmental issues complicating the picture, I believe real estate funds will be more difficult to obtain overall.

Q: How do you believe that turnaround managers can be more helpful in their dealings with asset-based lenders?

A: I believe all parties stand to gain when we work together. Specifi­cally, turnaround managers can come to us with transactions, talk to us about how problems are being worked out, and how the work of restructuring the com­pany is progressing. We also like turnaround mangers to listen to our issues as lenders.

Q: What have your greatest disap­pointments been in your deal­ings with turnaround managers?

A: I personally have not run into any big disappointments in working with turnaround man­agers. And in fact, I would wel­come the opportunity to do more business with turnaround man­agers.

Q: What do you think is a reason­able expectation for the time re­quired to close an asset-based loan if the meter starts ticking the day the information packet is first sent out?

A: This always depends on the com­plexity of the situation and on audit issues. The time span usu­ally ranges from 30 to 90 days.

Q: What is your view when you know that competing lenders are also looking at a loan request that you are evaluating?

A: Our technique and approach do not change in any significant way when there is competition. We always give our prospects the best offer that is appropriate for them, regardless of how many others are working on the transaction.

Q: At what stage should the loan applicant confine his efforts to a single lender?

A: An applicant should work with just one lender after all expres­sions of interests are reviewed and a good faith deposit is ex­pected.

Q: Do you find significant differ­ences between asset-based lend­ers in loan pricing?

A: Loan pricing is based on a greater number of variables, including in whose portfolio the loan is placed. Any one asset-based lender’s rates can vary by several percentage points from one bor­rower to another, depending on the particular transaction. How­ever, when competing lenders are pricing the same deal, their rates are likely to be closer together.

Q: Which are the major distinc­tions among asset-based lenders?

A: I think that one very important distinction is how involved does the asset-based lender become with the borrower’s manage­ment? How many knowledge­able people from the lender’s side become directly involved? As I mentioned earlier, good man­agement is very important to us—­so we roll up our shirt sleeves and get right in there in order to structure the best possible trans­action.

Another key distinction lies in what I call "stick-to-itive-ness." How long will the lender stick with their clients? If you take a look around, there are some real differences in this area. Some lenders will stick with their clients a lot longer than others will.

A third distinction can be found in how various lenders empha­size different factors in evaluat­ing credits. I believe many com­panies fit on a spectrum in this regard. At one end are the lenders that rely heavily—or even totally­ on collateral. On the other end of the spectrum are the asset-based lenders who are more like bank­ers. They are concerned more with cash flows and profit and loss performances.

Q: "Just say ’no’" seems to be a slo­gan that many lenders have adopted this year in their deal­ings with American businesses. What’s the picture from where you stand?

A: Since early 1991, leading econo­mists have been debating the causes and curses for a nation­wide credit crunch. To encour­age banks to reopen their doors to corporate borrowers, the Fed proposed loosening banks’ capi­tal reserve requirements and easing accounting rules for writ­ing off non-performing loans. Greenspan lowered interest rates, hoping to ease the credit drought.

But despite central bank inter­vention that pushed the federal funds rate target for overnight borrowing from 8.25 percent to 5.75 percent over the past year, the credit crunch is still putting a damper on business activity across the country.

Many companies with good credit have just stopped looking for credit, while other companies with lower credit ratings cannot obtain loans. A good number of businesses have had to do with­out the credit they need to grow. Revolving credit lines have been disappearing as banks run into trouble of their own. Companies in turnaround situations are likely to be the first to get the cold shoulder from traditional sources.

Q: Why is asset-based lending growing?

A: There are several reasons for the growth that asset-based lenders are experiencing. First, some asset-based lenders are not con­strained by the same capital regulations as are banks. Addi­tional reasons why asset-based financing is growing at 19 per­cent a year become clear if you understand how asset-based fi­nancing works. The chief reason why asset-based lenders can suc­ceed where bankers fear to tread is because they are able and willing to take on more risk.

Q: How can asset-based lenders take on higher-risk clients during dif­ficult economic times?

A: Asset-based lenders can assume more risk than others because all asset-based loans are thoroughly secured using accounts receiv­able, inventories, or equipment as collateral. These types of col­lateral are relatively stable in the current economic climate and can insulate asset-based lenders from many of the effects of recession. In contrast, loans secured by commercial real estate-where values are eroding drastically ­are creating difficulties for even the nation’s largest banks.

Q: What can asset-based lenders do for companies in Chapter 11?

A: Demand for debtor-in-possession financing for companies in Chapter 11 reorganizations has grown dramatically over the past three years or so. Under debtor-­in-possession financing arrange­ments, the debtor remains in control of the company and its assets while a plan to repay creditors is created. A debtor-in-­possession company may also be able to obtain new loans. In ad­dition to offering support at a time when a turnaround is still possible, asset-based lenders can also negotiate the terms of a Chapter 11 financing before the client company formally enters Chapter 11. Having this work done in advance can facilitate the approval of the reorganization plan by a bankruptcy judge.

Q: Is asset-based financing just a one­time emergency measure—or do you see clients coming back for more?

A: Over the years a client can—and does—return to asset-based fi­nancing to meet new and grow­ing needs. One manufacturer of steel pipe fittings, for example, came to us initially to finance a leveraged buyout. The next year they returned for funds to com­plete a second acquisition and for working capital to fuel expan­sion and growth. Eventually they purchased a competitor who was on the verge of financial collapse. All in all, that company estimated it saved a total of 360 jobs as a result of asset-based financing that kept the company from go­ing out of business. Since it is flexible and available under tight credit conditions, asset-based fi­nancing can provide solutions to many situations on an ongoing basis.

This year, as many banks step back from American business, asset-based lending plays an even more critical role as it helps fill the void. Asset-based financing is helping more and more com­panies with stronger balance sheets prosper and grow. And that’s the proper job of a financial services company.