Asset-based lending is growing in scale and importance at the nation's large banks, and bankers say it has as much to do with a changing perception among big corporate borrowers as with banks' efforts to diversify in recent years.
A handful of banks have eclipsed big specialty asset-based lenders such as GE Capital Finance Corp. and CIT Group Inc.
Among them is Wachovia Corp., which on Monday said it had merged two asset-based lending units into Wachovia Capital Finance to achieve brand clarity and help cross-sales.
"Ten years ago this was viewed as something you needed to do if you were having financial difficulty, as working capital for turnarounds," said William R. Davis, who was named the head of Wachovia Capital Finance.
Asset-based loans now are being used more often by large, healthy companies looking for working capital or financing for acquisitions and expansion. And many large asset-based loans are being syndicated among groups of banks, just as conventional loans are.
"In addition to becoming a more competitive product pricewise, you've got all the major banking institutions in the country offering this product and introducing it as a possible alternative," Mr. Davis said. "The stigma of using a secured, asset-based transaction that existed 15 or 20 years ago has disappeared."
According to Loan Pricing Corp., banking companies were the top arrangers of syndicated asset-based loans in 2004, the first year Loan Pricing gathered data. Bank of America Corp. held the top spot.
Two weeks ago B of A replaced the former FleetBoston Financial Corp. executive who had been running its asset-based lending unit, Bank of America Business Capital. Bank of America became the largest lender in the group when it bought Fleet last April.
Joyce White, formerly the unit's Pacific/Southwest president, took over from James G. Connolly, who had run the unit after the merger and oversaw Fleet's asset-based lending business before that.
Wells Fargo & Co., which Loan Pricing was No. 7 in the league tables last year, recently said it is interested in acquisitions in asset-based lending. Banks that have already made such purchases include PNC Financial Services Group Inc., which did one in 2001. PNC was No. 8 in the league tables.
Wachovia combined Congress Financial of New York (which Mr. Davis had headed for many years) with the smaller Wachovia Capital Finance, part of the Charlotte-based company's corporate and investment banking division. Wachovia was No. 2 in the league tables, Loan Pricing said.
The changes come as asset-based loan volumes multiply and the market continues to evolve from a niche business into an important part of many banks' corporate banking strategies.
U.S. asset-based loan balances tripled between 1993 and 2003, to $340 billion, according to the most recent data available from the Commercial Finance Association, the industry's New York-based trade group. The trend was solidly positive every year during that time except 2001, when balances fell 8.25%.
The association projects the market will grow as much as 3% this year, to about $364 billion.
Asset-based loans traditionally had been viewed as riskier and therefore were more costly than other forms of financing. But bank mergers in recent years have created larger bank players and more competition.
Asset-based loans can range from a few million dollars to $500 million or more. They are secured by real estate or other hard assets, or by pools of assets, such as accounts receivable. (Traditional bank loans are typically unsecured and underwritten based on borrowers' cash-flow projections.)
Until recent years the business focused on financially troubled borrowers in the midst of restructurings, who typically might only be able to obtain credit by pledging assets as collateral for a loan. The association with foundering companies gave asset-based loans a reputation that the industry has worked hard to shake.
However, negative perceptions about the business are still common enough that even big lenders such as B of A and Wachovia still sometimes battle them when dealing with potential borrowers.
An article on Bank of America Capital's Web site, for example, is headed, "Six Myths About Asset-Based Loans." They are not only for troubled companies, there is no taint attached to shifting from unsecured financing to asset-based loans, and they are not necessarily more expensive than other types of loans, B of A says.
With concerns about reputation damage easing, asset-based lending is booming. At Congress Financial, for example, loan commitments are now $15 billion, against about $2 billion a decade ago. (Wachovia's combined portfolio is now more than $20 billion, Mr. Davis said.)
Wachovia's decision to merge the two units was unrelated to a three-year campaign to cut expenses by up to $1 billion a year, Mr. Davis said. "We've been operating two business units, and it has been confusing internally and externally."
The name change will allow the unit to take advantage of Wachovia's nationwide brand recognition and brand advertising. And with the business now consolidated in Wachovia's corporate and investment banking division, it will be easier to cross-sell other services, he said.
