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Recent Lending Trends and the Next Recession

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David Johnson is a career change agent who has served as interim manager or financial advisor on over $5 Billion of distressed middle market transactions.

In his nearly 20 years as a change agent, David has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations.

David has several publications to his credit and is a regular speaker on the topics of change management, performance improvement, turnaround and restructuring. He received his MBA from the University of Chicago and completed his undergraduate studies at Fairleigh Dickinson University.

Published in: Economy & Finance, Business
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Recent Lending Trends and the Next Recession

  1. 1. Recent Lending Trends and the Next Recession Author: David Johnson August 25, 2013 1
  2. 2. Overview • Commercial and industrial (“C&I”) lenders found themselves in a difficult position at the end of the 2008-9 recession. The economic recovery was tepid at best, and growth prospects for small and mid-sized companies were poor. • Nonetheless, with banks and commercial finance companies having recovered, there was eagerness to lend. • The simple dynamics of supply and demand manifested themselves, and over time lending standards have loosened, and some of the troublesome practices of years ago, such as PIK toggles, have made a comeback. • There is now increasing evidence that middle market companies are struggling with underperformance, signaling an increase in the default rate in coming months. This prompted us to think through just what restructurings will look like during the next recession. 2
  3. 3. Deal Trends 3 • Average deal size is up nearly 140% since 2011, as lenders gravitate to the companies that have an appetite for loans: private equity backed companies and larger private companies seeking growth through industry consolidation, international expansion, or both.
  4. 4. Deals by Size 4 • Though deals over $250MM accounted for approximately 75% of ABL commitments since 2011, there is still an important portfolio management component to the loans that have been extended. More than 500 loans with a commitment size below $25MM were made in the ten quarter period assessed (Q1-11 – Q2-13).
  5. 5. Deal Statistics 5 • Deals below $50MM were nearly 60% by number but less than 6% by amount committed.
  6. 6. Conclusion • As the C&I market has skewed toward larger deals in the wake of the recession, the outline of the restructuring market for the next recession has begun to come into focus. • Increasing exposure to larger deals will create an uncomfortable dynamic in which the failure of some deals will be too painful for lenders to contemplate, suggesting drawn-out turnarounds as an approach to increase enterprise value and bailout lenders unable to take severe haircuts on large exposures. • On the smaller side of the market, we believe that the move toward distressed M&A as a means of credit risk transfer will continue, as lenders address the portfolio management challenges of troubled credits by insisting on a quick sale, rather than backing a more time-intensive turnaround process. 6
  7. 7. David Johnson • David Johnson is a founding partner of ACM Partners. His advisory experience spans North America and ranges from pre- revenue startups to Fortune 500 companies. • An active member of the Chicago business community, David currently serves on the board of directors (audit committee) of Gateway Foundation, a $70 million nonprofit organization focused on providing substance abuse treatment. Additionally, he is an active member in several professional associations. • David’s writing has appeared in several industry publications, and he has lectured at the University of Chicago, Northwestern University, the University of Wisconsin-Madison, the University of Illinois-Chicago and Loyola University Chicago. • David earned his MBA from the University of Chicago. His undergraduate studies were completed at Fairleigh Dickinson University. David can be reached at david@acm-partners.com or 312-505-7238. 7
  8. 8. About ACM Partners • ACM Partners is a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services. • David Johnson can be contacted at: – Email: david@acm-partners.com – Ph: 312-505-7238 • For more information visit: www.acm-partners.com. 8

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