In the 1980 movie, “The Empire Strikes Back,” the “dark side” (non-bank ABLs) forces mount an attack against Luke Skywalker to strike back. Much like in the movie, the “Empire” has been waiting to strike back against the banks (including bank-ABLs). In my most recent article, “Up in the Air,” I discussed the freezing of the ABL market due to the COVID-19 pandemic. COVID-19 provided the catalyst for a years-in-planning battle that is going to take place once the ABL market unfreezes in the next few months. The non-banks lenders have been preparing for quite some time for this momentous battle. What is unique and perhaps not surprising is that during the past few years, the central recruits to the proverbial “dark side” have been bank-ABL professionals.

The non-bank lending world was built on the back of regulation that impacted bank-ABLs after the last recession. These groups formed and grew starting around 2010. Most of the early founders of the current non-bank lending industry were all hired or acquired from people trained at Foothill, CIT, and GE, among others. What is interesting to note is that while the early founders of today’s non-bank world came from non-banks, the latest last wave of “recruits” came directly from the bank-ABLs. This hiring splurge over the past years was very much targeted towards bank-ABLs to recruit talent before a market crash. These hires solidified national footprints and teams for the major non-bank ABLs.

Make no mistake that right now, non-bank ABLs are fully staffed and will be ready to go once the ABL market unfreezes and stabilize their portfolios. This is not a mistake as we are about to experience a feeding frenzy once the non-banks get stabilized from the impact of COVID-19 and can start helping banks exit credits. Bank ABLs had a front-row seat during the last economic cycle watching commercial bank C&I groups book assets, knowing only so many would become transfers versus kick-outs. Many had a preview of what was surely to come and purposely made the jump before any catalyst taking place. The collision course of banks, both C&I and ABL, with non-banks started well before 2019. That said, 2019 was a seminal year as banks fully realized that 2020 was an election year, and the economy was in extra innings. To put it bluntly, senior executives expected something, although maybe not the unexpected – such as a global shut-down.

No one forecasted a pandemic, but the nation’s largest banks certainly had a recession in mind and started being vigilant by pushing out lower-rated credits. This is another reason why certain special assets groups were downsized as banks tried to get ahead of a curve they saw coming to some degree. A depression is different from a recession, which is what banks were planning for by proactively pushing out clients and reducing expenses as part of the preparation. Non-banks saw a starker trend and aggressively started recruiting bank-ABL professionals to join them. What we are about to witness is the results of a multi-year recruiting and capital raise strategy across the non-bank landscape.

Battles are fought and won depending on the arena, and we are entering one where the lowest cost is not going to prevail against bank capital preservation and OCC monitoring. Banks are going to be at a stark disadvantage – look no further than the stress placed upon them to administer government SBA capital. The non-banks truly do offer structure and flexibility in return for the cost. They are also more prolific in terms of stretching and lending against non-liquid collateral. Some job movements should be expected in any environment. However, a significant shift took place well in advance of this recession by career bank-ABL professionals trying their hands on the other side. The past year has been akin to the trade deadlines in the sports world, with big names being announced each week.

The bank-ABLs have strongly controlled the ABL market share over the past few years, and they are about to experience brutal competition from non-bank ABLs given the capital that came into the space and consolidation.  You can call the non-banks “Imperial Forces” given their need to recruit from banks and the banks the “Rebel Alliance.” The best way to do that is to go after talent, and that is what is happening. The beneficiaries are known to all.

The past few years, Great Rock, Encina, Wingspire, MidCap, Ares, White Oak, Gibraltar, CIT Northbridge, and even SG Credit have recruited heavily from the bank-ABL workforce. The bank-ABLs that lost talent are the leaders, and it is not that there is anything wrong with them. Rather it is a chance for skilled professionals to put their skills to work in an unregulated environment. Talk to any good former bank-ABL executive, and you will hear stark differences in the environment, atmosphere, and velocity of deals. You will also hear about the pressure that comes with it as the leash is not nearly as long outside of a bank, and the selling proposition is starkly different.

Capital cannot be a loss-leader for treasury services outside of a bank. It’s an intuitively hard challenge for folks who are used to competing on paper-thin margins to lock up the treasury in return for giving away the rate. We are also now dealing in a market and regulatory environment that makes it very hard to get deals done. Every person always dreams that the grass is greener on the other side. Sometimes it is, and sometimes it is not; however, in the past few years, many bank-ABLs took a chance and made a significant change. The seminal challenge will be adjusting to yield and structure versus pricing and platform.

The change is not for everyone, given the pressures and rates that will never compete with a bank, but the freedom and flexibility to operate in a non-regulated environment are there. The ABL business has always been a zero-sum game between bank and non-banks, and right now, we know where the BDOs are going. After years of bank-ABLs flexing their muscles, a new dawn is finally upon us. This is the first time in years where finance companies finally have a distinct advantage – talent, capital, regulatory and national platforms. They have a tornado as a tailwind working in their favor for years to come. What is interesting is that there is a symbiotic relationship right now in that banks significantly and quickly need to exit credits to free up capital. In the end, the banks are going to be stronger than ever, but right now, the “dark side” is where the fun is going to be.

Link to article here.