Today’s ‘Logistics Nightmare’ May Have a Surprising Upside for Asset-Based Lenders, Advises Tiger Group Valuations Leader

NEW YORK, Oct. 4, 2021 /PRNewswire/ — Asset-based lenders have good reason to be optimistic despite the effects of supply-chain disruption on retail and wholesale borrowers, advises  Ryan Davis, Managing Director of Valuation Services for Tiger Group, in an analysis column for ABF Journal.

"The counterintuitive truth is that asset-based lenders are generally in a surprisingly strong position right now," Davis writes. "Borrowers are continuing to increase prices and capture higher-than-normal margins. Many have also slashed spending and defensively hoarded cash. As a result, their balance sheets are often healthier today than they were prior to the pandemic."

With limited exceptions such as wear-to-work apparel, the executive adds, "asset values have largely remained the same—or even appreciated—since the start of the pandemic."

In the Sept. 28 piece ("Does the Current ‘Logistics Nightmare’ Have a Surprising Upside?"), Davis acknowledges that supplies have dropped to levels not seen since just after the Great Recession. But while inventories may be suppressed today, he writes, "they are likely to bounce back in a major way in 2022, translating into robust activity for the ABL sector as the restoration of supply drives up borrowers’ capital needs."

But fortunes of individual borrowers will continue to vary. In the piece, Davis sketches out headwinds that, for certain types of companies, could pose further challenges.  

The list includes the worsening gap between the haves and have-nots across the U.S. economy. "U.S. retail chains with the greatest scope and scale were able to stock up on inventory in anticipation of supply-chain bottlenecks," Davis observes. "This dominant subset has been able to offer otherwise-unavailable inventory– and further push up prices."

By comparison, smaller retailers are like the glasses on the lowest level of a wedding champagne tower: "As the bubbly runs out, they get nothing," Davis writes. "It is important to evaluate where borrowers sit in this hierarchy."

A lack of inventory will, unfortunately, force some borrowers to miss their Q4 (and, possibly, Q3) projections, Davis notes. But while lenders should temper expectations for Q3, Q4 and even the first half of 2022, inventory supply should be dramatically longer this time next year. "That means borrowers will be turning to asset-based lenders to support their growth in inventory and rebooted growth plans," Davis writes.

Meanwhile, question marks also loom over the reliability of online shipping for all but the largest operators during the holiday season, Davis notes. Such shipping obstacles "could cause smaller, thinner-margin borrowers to struggle to satisfy their customers during the worst possible time for such failures," he writes.

In the conclusion to the piece, he encourages ABL lenders to gauge borrowers’ ability to adapt over the short and medium term. As borrowers race to stock up on inventory, for example, a critical factor is whether the assets they aim to acquire are short- or long-lived.

"At Tiger, we support the strategy of ‘going long’ on long-lived assets (examples could include non-fashion basics like t-shirts, top-selling models of air conditioners or popular SKUs of car tires, all of which can be sold for years without any modifications)," Davis advises. "As lenders scrutinize borrower health, they should look to see whether those with long-lived collateral are being proactive, based on the premise that it’s better to stock up and work through this inventory over time than to be caught flat-footed."

By contrast, making similar investments in short-lived assets such as fashion apparel or highly seasonal merchandise is a gamble. "Typically, companies that sell short-lived assets are less able to pass along such costs," Davis concludes. "Today, they are largely able to do so thanks to the short supply; however, this situation will not last forever."

The full column is available at: https://www.abfjournal.com/articles/does-the-current-logistics-nightmare-have-a-surprising-upside/

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SOURCE Tiger Group