Successful Lending in an Uncertain Market

Press Release
Summary: Gary Prager, a Managing Director at GB Merchant Partners, shares his views on current market conditions and how lenders can be successful in these uncertain times.

How would you characterize today’s markets?

Prager: No doubt markets have changed, especially over the past two quarters as liquidity has become more difficult to obtain, particularly in special situations. Everyday you hear terms like credit crisis, market crash, foreclosure, valuation uncertainty, recession and bankruptcy, all of which are affecting the current lending environment. For most lenders, the message is clear. Recessionary pullback is no longer a question but a reality. That, in turn, impacts how they must approach the financing needs of borrowers. What’s more, it appears this uncertainty will continue for the coming months, which means the lending environment will remain choppy at best and that liquidity is sure to be at a premium for some time.

Are you saying that we are in a recession then?

Prager: With nonfarm employment declining for three successive months, sagging consumer confidence and the impact that rising commodity prices are having on personal consumption, it appears we have entered into a recessionary period. However, the central question is whether it’s going to be a prolonged period of economic downturn and will it be coupled with a significant decline in the GDP? What we are seeing now is a recession that’s balancing out the excesses that arose during the periods of aggressive expansion over the last decade. This is particularly evident in the areas of housing and financial services.

Do you think these markets have bottomed out?

Prager: It appears the housing decline still has a way to go before we reach a discernable bottom. In the most overbuilt housing markets, it’s not unusual to see new permits off by 90%. Those same markets are experiencing significant price deflation which further contributes to a loss of consumer confidence, wealth and spending. These markets account for significant consumer concentration and have a major impact on consumer spending patterns. Through our parent company, Gordon Brothers Group, we see all too clearly the effect on consumer spending as weakness has spread from housing to related industries, a slowdown that will most likely continue well into the second half of this year. As a result of this, we are seeing an increase in the need for financing to a variety of industry sectors, everything from Industrial Manufacturing where a company may be producing stainless tanks used for ethanol transportation to Media where declining ad sales are creating liquidity problems.

Given these market conditions, are lenders able to meet the financing needs of borrowers?

Prager: This is the type of environment in which many lenders find themselves with good clients whom they would like to support but are unable to because of an overarching concern of where values are headed. This is true of both asset-backed or enterprise value facilities. As a result, many lenders look to value-added partners for help. For example, at GB Merchant Partners, we provide a consistent source of capital to senior lenders or equity sponsors in a wide range of industries to help complete the capital structure.

Can you describe a recent deal you’ve done to illustrate that point?

Prager: Absolutely. As a direct result of the decline in the housing sector, a nationally recognized building products chain saw both its sales and EBITDA in a downward spiral. Despite the disruption in the market, the company had considerable real estate which it owned. GB Merchant Partners, together with DJM Realty, the real estate affiliate of Gordon Brothers Group, was able to develop liquidity profiles on over 300 properties and provide a consortium of lenders with a value proposition which resulted in the company being able to monetize these assets as part of broader capital restructuring.

About Gary Prager, Managing Director, GB Merchant Partners
Gary Prager runs the direct lending business of asset-backed and enterprise value loans at GB Merchant Partners, the investment management affiliate of Gordon Brothers Group. He can be reached by phone: 404-307-0165 or email: [email protected]