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When traditional cashflow lending tightens, liquidity doesn’t always come from the usual places — sometimes lenders have to break companies into smaller, more financeable pieces.
Carving out working capital assets, which involves isolating and valuing receivables and inventory in standalone structures, has emerged as a go-to strategy for borrowers looking to unlock incremental capital without refinancing their entire capital stack.
On this episode of Cloud 9fin, Anna Russi speaks with Mitch Soiefer, partner and head of lender finance at SLR Capital Partners, to unpack how working capital assets are being carved out of traditional credit agreements to keep capital flowing, and why these structures tend to show up late in the credit cycle.
Have any feedback? Send us a note at podcast@9fin.com — thanks for listening!
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Anna Russi:
Hello, and welcome to Cloud 9fin. I'm Anna Russi, a private credit reporter at 9fin, and I'm here with Mitch Soiefer, who is a partner and head of SLR’s Lender Finance vertical. Mitch, welcome to the pod.
Mitch Soiefer:
Hey, thanks for having me. Nice to be here. And just by way of background, as you said, Mitch Soiefer, work at SLR Capital Partners, run the Lender Finance business there, and excited to be here. Thanks for having me.
Anna Russi:
Awesome. So today we are going to talk about carving out working capital assets. And to start us off, Mitch, why don't you tell us how you define carving out working capital assets? And why has this become more relevant in the private credit market?
Mitch Soiefer:
So it's a great question. Taking a step back, traditional leveraged finance is cashflow lending, lending money on the cash flows of a traditional business.
When we talk about carving out working capital assets, it typically means for a business that raised a cashflow loan some period of time in the past. And in those facilities, there's often a carve-out that says you can raise additional capital against the working capital, accounts receivable and inventory, most traditionally.
And that is a basket that is a carve-out of a credit agreement. And so we are seeing that trend much more frequently today. And so when people say, what does that mean? It means raising additional liquidity to a business that probably already has leverage in the capital structure.
Anna Russi:
Awesome. Thank you. And you mentioned accounts receivable and inventory carve-outs. How much of that momentum do you think is structural, something that is here to stay, or more a response to higher rates and tighter cashflow underwriting?
Mitch Soiefer:
So SLR is actually a multi-strategy asset manager. We have a dedicated asset-based lending group focused on doing working capital transactions against accounts receivable and inventory. So we know this market really, really well.
And what I would say is this is not a new phenomenon. This is something that has been happening for north of 10 years in the credit markets. What I would say is at the moment, we're seeing more of it.
And what we usually see is either late in an economic cycle or if there's periods of time where a company hasn't refinanced or needs additional liquidity, that's when we typically see opportunities like this start to expand.
So, as we look right now, we were in a higher interest rate cycle, we're a little bit later in the economic cycle. And so it does make sense that we're seeing more transactions like this. So I think it is here to stay. I think it comes and goes a little bit, but there's always some of it that is occurring.
Anna Russi:
And can you walk us through the mechanics? How do you structure that?
Mitch Soiefer:
It can be done a couple different ways. So the one I mentioned at the beginning is you have an existing credit facility and there's a carve-out that is defined in the credit agreement. It says, okay, you can do a new $100 million working capital facility. It's a billion-dollar credit facility.
What's going to happen is a lender, like SLR or others that focus on asset-based lending, will say, okay, let's look at the receivables and inventory. And we can effectively carve them out of the collateral pool that the existing credit providers have.
So you will set up either an SPV or just finance the company, but get a direct first-lien on those working capital assets. So, the new lender will have a first-priority interest on the accounts receivable and inventory in that situation.
A new credit agreement, oftentimes an inter-creditor with whatever may exist at the time. And that's how the financing will work.
Anna Russi:
Okay. And in those situations, what is the main goal? What are you looking for?
Mitch Soiefer:
So, the main goal from a company perspective is to unlock liquidity. So, it might be that a company is in transition. Maybe they've had something that hasn't gone exactly according to plan. Or they just need to build a new facility and are looking for additional ways to unlock capital.
So, that's what the company is typically looking for. For us, we're just trying to be a liquidity provider into the market and help our borrowers. So, we look to provide financing to these companies in a secured manner, first lien secured by assets.
And the companies are looking for ways to access the capital markets that might be slightly nontraditional.
Anna Russi:
And talking about the borrowers, what kind of businesses are those? What kind of company fits better for carving out working capital?
Mitch Soiefer:
So, it's going to start off being companies that have significant amounts of working capital. Usually those are businesses with large amounts of revenue and maybe a slower payment cycle on their receivables.
Think of staffing companies where they might have tremendous amounts of accounts receivable, but their large institutional clients may pay them on a slower basis. It could be transportation companies. It could be industrial businesses.
Really, there's a lot of different companies that this might make sense for, but it really tends to be businesses that do have large amounts of either accounts receivable or inventory. Retailers would fall into the inventory category.
Anna Russi:
Interesting. And then, we have been hearing a lot about stretch ABL. Can you explain what is stretch ABL, and why lenders might be more comfortable today pushing into that?
Mitch Soiefer:
So at SLR, what I would say is we don't really like to do stretch ABL. Stretch ABL can mean different things to different people.
But the way I think of it is the working capital assets might be a hundred dollars and a traditional financier is going to provide 85 cents on accounts receivable or 60 cents on inventory. A stretch ABL might say, even though the working capital is a hundred, I'm going to provide 110 and I'm going to try to get myself paid down in some period of time.
That's what I would think of. And there is that out there. We don't do that at SLR. We say, let's stick to what we've done. We want to stay inside the assets. We want these to be borrowing base-driven transaction because we know credit cycles change and whether the economy is good or bad, in an ABL deal you want to make sure you're secured.
And in stretch facilities, you may not be fully secured. So we tend to stay away from them. That said, there is a market where other firms will look at it a little bit differently or try to tie in other types of collateral, maybe certain types of PP&E or other things. But that's traditionally what I think of when I think of stretch ABL.
Anna Russi:
Interesting. And then, when you're looking at risks and assessing, what do you look at?
Mitch Soiefer:
So for us, it comes down to making sure that, number one, the collateral is real. So we're doing field examinations. When we get started on one of these transactions, we hire a third party to go out and inspect the inventory if it's inventory.
On receivables, do verification work, call the debtors, make sure that all of the receivables that we see are real. So, verification work is really, really critical.
Then, we're looking forward to make sure that the systems of the company are working, because you're only as good as the information you get. So we'll do a deep dive on the credit reporting that they get and their systems checks and things along those lines.
We'll even do background checks on businesses we look at because we always want to make sure we're backing high-caliber, high-integrity people. And then, you want to make sure that the companies have an ability to report on an ongoing basis good information.
For us, we also like businesses that, while traditionally if you're unlocking working capital maybe you need liquidity for some period of time, we want to make sure these businesses are real going concerns, have a real reason to exist. We're not looking to walk into a situation that might be a lot of turmoil over the next 12 months.
Anna Russi:
Fair enough. And, how hands-on are boards and lenders getting regarding liquidity decisions with those companies?
Mitch Soiefer:
There are two different parts to that. So, boards, very much so. All companies are really focused on maintaining liquidity and making sure they've got adequate capital to go over the next couple of years.
There's obviously plenty of noise out there, whether it be geopolitical or economic or rates. And so, companies all want to make sure they're optimizing their liquidity and setting themselves up for success. So I would say boards are very focused on it from the company perspective.
On the lender perspective, what I would say is, at SLR, we have north of 300 people. Over half of them are dedicated to our asset-based lending strategies. And that's because it is a very labor-intensive business.
You are constantly doing work at underwrite, doing work after you've closed to make sure the portfolio monitoring and the receivables have not changed or that there's been edits or things that are not valid. And so it is a very hands-on business and you need teams that have been doing this for some period of time that know how to find when there's issues.
So, I would say very much a hands-on business, especially from a lender perspective.
Anna Russi:
Awesome. And how do you think the liquidity of these assets compares with traditional credit structures?
Mitch Soiefer:
It is different. These are usually revolving facilities, not all, but usually they are. And it's companies that sometimes have access to capital markets already and are now looking for additional sources of liquidity.
So I would say that the liquidity profile of each business is probably a little bit different, but it's going to be driven in these scenarios by how much working capital they have. So as their receivables and inventory pools expand, it increases their liquidity. As they start to shrink, it might reduce their liquidity if they're not generating cashflow from their operations.
And liquidity is an important point, but these markets will cycle. Right now, asset-based lending is very strong and the topic of the day. When the economy is doing really well and there's more liquidity in the market, then cashflow lending starts to be a more opportune market and we see more opportunities there.
Anna Russi:
Definitely. Well, ABL has been the hot topic in the market for the past few years, I would say. And Mitch, to wrap it up, when looking ahead, where do you see the biggest innovation in specialty finance lending coming from? Is that more collateral types, more dynamic borrowing bases, deeper data integration? Where do you those?
Mitch Soiefer:
So we're always looking at new asset classes, but what I would say is in asset-based lending, sticking to the knitting is really the way to go, at least for us. We want to do the same thing today that we were doing yesterday, to the extent applicable, but not trying to stretch on the types of collateral we might be looking at.
But what I would say is where I do see change is the implementation of technology. I would say there always are new products, but clearly, there will be more and more technology that comes into this space.
For now, we still rely on people for verification work. We think that's really important because it's easier to find if something was not accurate if you're calling the other person on the other line and saying, hey, was this real.
But improved technology and borrowing base reporting will continue to improve, and we will see more technology for some of these asset-based lending businesses.
Anna Russi:
Well, follow-up question, although I did say it was the last one. When you say technology, what are you talking about?
Mitch Soiefer:
So software systems or technology on behalf of the lenders, not necessarily the borrowers or traditional businesses. Lenders might try to utilize different enterprise software, might try to use different things to streamline the work product.
Anna Russi:
Interesting. Well, this was great, Mitch. Thank you for joining me and thank you to our listeners. This was Cloud 9fin.
Mitch Soiefer:
Great. Thanks for having me.