DOWNTURN WOULD MEAN UNCERTAINTY FOR
NEW BREED OF ASSET-BASED LENDERS - Buxbaum Group’s Stevan Buxbaum outlines risks in ABF Journal article

CALABASAS, Calif. (5/3/07) – Massive shifts in the asset-based lending industry make it far from clear how lenders will fare during the next economic downturn, Buxbaum Group executive vice president Stevan Buxbaum writes in the May 2007 issue of ABF Journal, a monthly trade journal for commercial finance professionals.

In his article, part of a cover package titled “It’s a Jungle Out There! Distressed Debt Market Offers Rare and Risky Rewards,” Buxbaum notes that the industry has undergone sweeping changes in recent years, with old-line lenders giving way to newer, more flexible ones. A wave of consolidation saw many better performing independent finance companies acquired by banks, which were in turn rolled up into bigger banks.

“While the number of lenders was reduced, both the demand for loans and the supply of capital increased. Suddenly, there was an explosion of new finance companies coming out of hedge funds,” reports Buxbaum, who has directed consumer product appraisals and liquidations for asset-based lenders for more than 20 years

In their zeal to get new business, many lenders—including traditional ones—have liberalized lending standards, Buxbaum says. “Where loans once were peppered with covenants the borrower had to meet, many now have none or are, to use an amusing new phrase, ‘covenant lite,’ ” he writes.

Buxbaum says no one is entirely sure how these looser loan structures will perform when the economy inevitably turns downward: “A sizable proportion of the loans being made by the new lenders may turn out to lack the assets to cover them. In many cases, the market’s entrepreneurial players have been overly aggressive in their policies, making loans on a cash-flow enterprise value basis but still marking them as asset-based loans.

Given those conditions, a recession would likely bring problems for the industry, Buxbaum asserts. “In many cases, money has been lent by companies in the belief that if the loan didn’t work out, the new-style lender would simply take over the company – in other words, they are lending to own,” he notes. “But if they are forced by a sour economy to own the company, they will need the ability to run and manage it.” That will mean added expense, probably in the form of hiring a turnaround firm to run the company.

“It’s always dangerous when risk is divorced from outcome,” Buxbaum concludes. “Many of these parties are playing with other people’s money. There always seems to be someone willing to do a deal, and the appetite for new money continues to grow. What will happen when the music stops? No one really knows.”

Press Contacts: At Buxbaum Group, Stevan Buxbaum, (800) 990-6820; at Parness & Associates Public Relations, Lisa Kreda or Bill Parness, (732) 290-0121.