Today, the array of lenders available to growing middle-market companies is rapidly expanding. Business development companies (BDCs) have been very active in this space of late. Such entities—which are allowed to borrow as much as they raise from shareholders—have been around since the 1940s, but the number of BDCs has grown to more than 50 in recent years. Another development has been the use of collateralized loan obligations (CLOs) by special-purpose entities to provide financing and then securitize a pool of loan assets. And, of course, hedge funds have entered the fray in search of better returns for their investors.
Let there be no mistake, in some cases, it can be difficult for a regulated entity to compete with an unregulated or lightly regulated rival for the same piece of new business. But customers don’t reward financial companies for denying the changes in the market; they reward them for seeing their way through competitive obstacles and making the adjustments needed to thrive in an evolving market environment.
At CIT, we have enlisted these new lenders as allies. It wasn’t so long ago that our company was a less-regulated lender itself. In recent years, we have adopted a more traditional banking model to gather deposits and lower our cost of capital while continuing to offer competitive financing solutions. What we have found is that working with non-bank lenders offers us a way to meet our borrowers’ needs while complying with the stricter leverage limits and additional regulations that apply to bank holding companies.
For example, the regulatory guidelines tell us that, as a bank, we generally shouldn’t extend ourselves beyond “4 x 6” leverage for senior and total debt respectively. A BDC, however, doesn’t have the same restrictions. Rather than decline to pursue such a deal, we have, in many cases, partnered with various BDCs and committed to lower “first out” leverage or provided revolvers that were senior in the capital structures. The BDC has taken the “last out” leverage. We have then carved up the deal economics that make sense for both institutions relative to our respective risk appetites and return requirements. This is essentially seamless to the customer because the company is securing a total financial package and solution.
Similarly, there are times when we rely on CLOs or other debt funds for syndication after we have underwritten a deal. These funds bring needed liquidity to the market and help to lower cost of capital to companies. Borrowers value our role in the transaction because they know we are committed to a long-term relationship and have the expertise to work with them if their financial performance deteriorates. Partnering with the CLO market and other non-bank funds is a way to manage the risk on our own balance sheet, while enabling us to support our customers’ expansion opportunities.
The value of relationship-based banking is one of the big reasons why we’re confident that the influx of non-traditional lenders will complement and not replace the traditional players in middle-market finance. In the final analysis, company leaders want to work with a lender who knows their business and has dedicated industry experts on hand. They want to know that their financial partner has worked with companies like theirs through good times as well as bad. And they want to work with lenders who have stable funding sources that won’t dry up when a downturn hits.
But, most importantly, the middle market needs financial providers who are constantly thinking creatively on customers’ behalf and are willing to go the extra step to help them grow. For us, these days, that can mean collaborating with those others might see as competitors. True to our 100-plus year heritage, we at CIT have once again found that you can get an awful lot done for your customers when you look at the market from their vantage point.
Jim Hudak is President of CIT Corporate Finance. Hudak has more than 25 years of experience in corporate and leverage banking, specifically targeting middle-market companies. To learn more about CIT, visit cit.com.