As reported in The Secured Lender, the retail asset-based lending (ABL) market continues to show resilience as lenders and borrowers have adjusted to the difficult economic conditions facing the retail industry. With retail deals accounting for roughly a quarter of all asset-based loans according to some estimates, retail is the largest single sector of the ABL market.

According to industry experts, many retailers learned lessons from the 2008-2009 downturn which left many retailers with excess inventory. Inventory levels are now generally much lower and many retailers also pursued aggressive cost-cutting measures. Many retailers have limited their usage of asset-based lines of credit, reflecting their cautious approach to business expansion plans. Lenders report that many borrowers, especially larger and more creditworthy businesses, are limiting their borrowing needs and maintaining greater liquidity.

Lenders have increasingly sounded optimistic about the state of the retail ABL market. Within the retail sector, high-end and discount retailers are enjoying the most success, as wealthy consumers continue to spend and less affluent consumers increasingly switch to cheaper alternatives.

The strength of the retail ABL model became clear during the 2008-2009 economic downturn when retailers' collateral values held up well, helping to minimize lenders' losses on loans. With many borrowers pursuing cautious business plans and limiting borrowings, lenders are increasingly comfortable with the risks involved in retail lending. They can also rely on well-established exit strategies if borrowers default. This has led to new sources of credit becoming available from non-traditional asset-based lenders, and many banks are now active in the retail sector as they look to deploy cash. As a result, lenders have increasingly had to compete for business, particularly from retailers who plan to borrow under their ABL facilities, and pricing, fees and loan terms have eased for many borrowers.

To learn more about ABL transactions, see Practice Note, Asset-based Lending: Overview.