According to data in the Secured Finance Network’s quarterly asset-based lending index and confidence index, Q4/23 was marked by steady confidence in the ABL, with lenders maintaining a positive outlook despite persistent inflation and rising interest rates.

“As the U.S. economy remains under stress, the asset-based lending industry is primed to meet new demand,” Richard D. Gumbrecht, CEO of SFNet, said. “Commitments have increased and portfolio performance remains solid. Should we see a recession, the ABL industry stands ready to provide vital working capital.”

In SFNet’s confidence index, lenders emphasized to the resiliency of the ABL industry, which Gumbrecht described as having “all weather” status. The most positive expectations in the index were in the demand for new business, hiring and client utilization. But banks and non-banks shared low expectations around their overall business conditions.

Survey Highlights

For banks, ABL commitments (total committed credit lines) were up 2.4% in Q4/22 compared to the previous quarter. Outstandings (total ABLs outstanding) fell by 1.6%, however and commitment runoff increased by 7.8% quarter over quarter.

“Both new commitments and commitment runoff remain well below their year-ago levels for banks reporting in Q4 2021 and Q4 2022,” the report said. “Lower new commitments and higher commitment runoff reduced net commitments in Q4, the second consecutive quarter of decline.”

Non-bank lenders, meanwhile, experienced a 6% rise in total commitments in Q4/22. Total outstandings were up as well, rising by 1.7%. Compared to the same quarter in 2021, total commitments and outstandings for non-banks rose by 10.4% and 18.6%, respectively.

“Further, a large majority of non-banks reported increased new commitments in Q4, which grew by 277% from Q3,” the report said.

In Q4/22, commitments runoff dropped by 21.9% from Q3/22 for non-bank lenders. A sharp rise in new commitments and decreased runoff caused net commitments for non-banks to reach their highest level since Q3/20, according to the report.

In terms of credit-line utilization for bank lenders, the rate fell to 40.1%, marking the second consecutive quarterly decline after more than a year of growth. Non-banks experienced a similar trend, as their combined utilization rate dipped from a multi-year high of 59.6% in Q3/22 to 53.8% in Q4/22.

“The drop for both bank and non-bank rates suggests that the ABL industry is returning to traditional seasonal fluctuations in utilization,” the report said. “As borrowers pay down outstanding balances, they typically build up in the third quarter of the year as they prepared for the holiday shopping season.”

As for portfolio performance at the end of 2022, banks started to experience movement toward “more normal levels” after record strong performance in previous quarters. For banks, criticized and classified loans, non-accruals and gross write-offs all rose in Q4/22 relative to Q3/22 but were still at levels well below historic highs. Non-banks continued to report solid portfolio performance, as 30% of such survey respondents reported a decrease in non-accruals quarter-over-quarter and none experienced an increase.

Now, the U.S. economy is at a fork in the road, the report said, further noting that “a strong labor market and low energy prices could continue to propel the economy, or persistent inflation, weak real income growth and sectoral slowdowns could prompt a recession. For now, a period of relatively weak growth is the best bet, but asset-based lending, as an ‘all-weather’ industry, is well-positioned to meet new demand in any scenario.”