Dan Flaro on the emergence of asset based lending in Canada

Dan Flaro, CFA
SVP, Country Head
MB Business Capital Canada Inc.

Many restructuring professionals and special loan bankers have been involved in situations where an apparently insolvent borrower was suddenly rescued by an asset based lender. Dan Flaro is one such asset based lender, leading the recently launched Canadian arm of Chicago-based MB Financial. Dan sits down with us to explain the basics of asset based lending and its role in the Canadian lending landscape.


1) For those unfamiliar with asset based lending, can you briefly explain how it differs from traditional commercial lending?

Traditional lending looks to fund companies on an enterprise value going concern basis and typically establishes generic financial covenant and / or borrowing base structures to flag deteriorating credit profiles. Bank sponsored asset based lenders are also looking to fund companies on a going concern basis but tailor their facilities to the unique collateral and cash flow profiles of their borrowers based on enhanced due diligence and monitoring. The ABL structure usually provides more financial covenant flexibility but the working capital advances may or may not be as generous. Non bank high coupon ABL lenders typically approach the market with a higher risk tolerance relative to the “going concern” part of the credit equation and are compensated accordingly.

2) How do you think the emergence of asset based lending in Canada has changed the lending landscape in Canada?

In the context of revolving working capital financing, ABL is still materially underpenetrated in Canada relative to its share of commercial lending in the U.S. The 5 major Canadian banks only began offering the product in earnest over the last 10 – 20 years. The industry is much more mature in the U.S. with major banks there in the business for several decades. Although there’s no reliable industry data here in Canada, anecdotal information would suggest the industry is slowly but steadily gaining market share year over year as the benefits of the approach become more widely appreciated by prospective borrowers and their advisors.

3) What are the key metrics you use to assess both new and current borrowers?

Financial performance is an important consideration for us. Like other regulated banks we allocate capital based on credit ratings which in turn are a function of historic earning and balance sheet ratios. Having said that collateral coverage is our primary consideration and we’ll prudently lend into situations that don’t fit the conventional banking criteria due to balance sheet leverage, rapid growth, turnaround etc. Management’s story is important to us and we have the ability to support the right management teams because of our ability to monitor collateral in the context of established and proven policies and monitoring procedures.

4) Asset based lenders are often viewed as “lenders of last resort.” Do you think this viewpoint is accurate?

The product is still often thought of in that context but the reality is most bank ABL borrowers use the structure because they have large fluctuating working capital financing needs and appreciate the covenant flexibility. The majority of ABL borrowers use the structure as a permanent senior debt solution as opposed to a bridge back to a conventional banking approach. Having said that, the enhanced monitoring associated with ABL is often better suited to enable banks to prudently lend to companies going through periods of rapid change, whether it be rapid growth or a turnaround. For situations that haven’t quite turned yet, there’s an established industry of higher coupon non bank bridge ABL lenders that would more typically be thought of as “last chance” lenders who can provide companies with more time to try and implement operational changes prior to a formal restructuring.

5) When can an ABL be a good solution to move a debtor out of a special loans group? Do you think the approach is still underutilized?

The pricing on bank sponsored ABL facilities is comparable to senior debt structures so in theory yes, if a the special loans group lending on a conventional basis is slow in normalizing pricing, terms and availability in management’s view to reflect an improvement in operating results, an ABL structure could be an attractive alternative. The enhanced due diligence, field audit work and monitoring associated with the ABL approach might improve the probability of a new bank taking on a refinance from another bank’s special loans group. The special loans groups in the banks have been pretty accommodating over the last several years while their conventional lending colleagues have been very aggressive, through what has proven to be a fairly favorable credit cycle overall. We haven’t seen this bank ABL / special loans refinance scenario play out as often as you would normally see in a more “traditional” credit cycle.

6) Asset based lenders are often more comfortable providing Debtor-in-Possession facilities to companies going through a restructuring in comparison to the broader bank. What special considerations do you need to make when lending into restructuring situations?

Certainly the enhanced monitoring associated with ABL is often better suited to fund into restructuring profiles but the legal / perfection benefits are the same. Different banks might have different perspectives but for the work involved, the key consideration would probably be whether there’s a relationship a bank wants to preserve upon exit. Non bank lenders in particular might be more interested in funding into a formal restructuring purely for the economics.

7) What is one thing that most people you work with would not know about you?

I was a Montreal Canadiens fan when I was younger but the Toronto media has broken me over the years. I find myself reading articles on the Toronto Marlies these days to see how the Leafs prospects are doing and haven’t missed one Leafs game this year. I’m certain they’ll win the cup this season. My wife and daughter think I’ve got a problem.

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