Findings from Q2 ’19 SFNet’s ABL Survey

DATA & INSIGHTS

For the first half of 2019 these tailwinds continued except for a brief disruption in the leveraged loan markets at the beginning of the calendar year.

Correlation (or lack thereof?) We acknowledge there is less than perfect correlation between the ABL market and certain economic / market indicators. However, we consider the following data as we evaluate the Q2 ABL market as there is some degree of inter-connectivity:

ISM Purchasing Managers Index 1

Consumer Confidence Index 2

Commodity Price Index 3

WTI $/bbl

Hot Rolled Coil Steel/ton

USA M&A Volume 4

Leveraged Loan and High Yield Volume C&I Loan Growth

3.1% 2.0%

2.40% 2.00%

2.60% 2.33%

55.3 51.7

124.1 121.5

120 116

$60 $58

$697 $536

$478B $631B

$193B $189B

9.3% 2.5%

1 Institute for Supply Management Purchasing Managers Index

2 Conference Board Consumer Confidence 3 IMF World Commodity Price Index 4 Source: FactSet

In Q2 there were several forces that seemed to contribute to a vibrant ABL market including: n Robust M&A volume n GDP growth n Resurgence in the High Yield bond market n Lower interest rates.

Notwithstanding the advantageous factors noted above, there were some darker clouds forming (escalating global trade tensions) on the economic horizon as we wrapped up Q2

including declines in: n Consumer Confidence index n Purchasing Managers Index n Commodity prices

Over the years we’ve witnessed ABL market resilience during times of economic uncertainty. When other markets have soured and economic conditions softened, the ABL market often rides out the storm. The data from 2012 and 2016 supports this claim. With an uncertain outlook, it will be interesting to see how the ABL market performs in the back half of 2019 and into 2020.

the highest percentage on record and 45% in Q2 stacks well against most of the quarterly measurements from 2016-2018. The Q1 ABL utilization was positively impacted by the dislocated leveraged lending market for Term Loan B, and High Yield Bonds coming into January 2018. The subsequent thaw within those markets has likely led to ABL pay-downs via new Term Loan B and HY bond issuance. As we write this report, we continue to watch the HY bond market conditions which are currently quite favorable for higher quality and seasoned issuers. For the Non-Bank market, the strong net loan growth in Q2 had a favorable impact on utilization which increased to 59.5% in Q2 ’19 from 57.2% in Q1.

Q2 Data Highlights Now to the hard data. For Q2 we analyze both the Bank and Non-Bank ABL data. As a reminder, we recently made a change to the reporting methodology. In lieu of dissecting the market by size only (large lenders versus small lenders) we now review the data by type of lender.

Commitments and Outstandings In Q2 the ABL Bank Market realized the largest net increase in both commitments ($3.6B) and outstandings ($2.5B) since the data has been collected. The $3.6B net increase was significantly higher than the $0.7B experienced in Q1 ’19. Similarly, the $2.5B net increase in outstandings is the highest recorded and compared favorably to the $1.6B registered in Q1 ’19. The Q2 ’19 net increase in outstandings continues the growth trend witnessed since Q2 2018 and likely reflects a greater willingness of corporate and sponsor clients to utilize the ABL product to finance their current business activities or prepare for uncertain economic times ahead.

Also noteworthy is 62.5% of lenders enjoyed an increase in new credit commitments in Q2 versus 30.4% in Q1, which suggests a ‘spreading of wealth’ around the industry for Q2 loan activity. Given the strong Q2 growth in net loan commitments and net loan outstandings, it is not surprising that Bank responses to the SFNet Confidence Index Survey were favorable related to future: 1) utilization; and 2) hiring expectations.

For the Non-Bank market similar themes were found in the survey data, most notably: n Dollar commitments rose 4.4% in Q2 compared to Q1. Loan outstandings increased approximately 5% in Q2 versus both Q1 ’19 and Q2 ’18. n The $210.6 M increase in net commitments is only the third quarter on record with net commitment growth above $200M. Furthermore, the net growth in loan outstandings of $129.8MM is the largest recorded and the third consecutive quarter of net loan outstanding growth. This dynamic had a favorable impact on line utilization in the Non-Bank segment.

Credit Quality Compared to most historical measures, the quality of Bank loan portfolios remained very high during Q2 ’19. However, we bring to your attention two data points from the survey (see pages 15&19). A larger percentage of lenders experienced higher levels of both non-accruals and gross write-offs in Q2 versus Q1. Specifically, 35.3% of lenders surveyed in Q2 witnessed higher levels of non-accruals versus 17.6% in Q1. Further, 23.5% of lenders incurred higher gross write-offs in Q2 versus 17.6% in Q1.

The Q2 data related to non-accruals and write-offs may have influenced how the Bank market participants responded to our survey. The SFNet Confidence Index registered declining sentiment in Q2 for the areas of portfolio performance and the business conditions outlook.

The Non-Bank portfolio quality remains high in Q2 with lower levels of non-accruals (both $ and %) as compared to Q1. Additionally, NonBank survey respondents were more optimistic about future portfolio performance in Q2 as compared to the Q1 survey results.

Conclusion Q2 2019 was a favorable quarter for both segments (Bank and Nonbank) in terms of new loan activity and continued the positive trend witnessed over the last few quarters. Loan quality for both segments also remains sturdy. There is, however, some divergence in the business outlook between Bank and Non-Bank lenders with respect to economic conditions and portfolio quality. We will continue to monitor future responses for clues to lender’s optimism and outlook. It is interesting to note that for Q2, the Non-Bank lenders scored a higher response than Bank lenders for all five (5) categories within the SFNet Confidence Index survey:

Survey Category Bank Score

Non-Bank Score

Economy/Business Conditions Portfolio Performance

1.84 2.08

1.79 2.25

Demand for New Business

2.16 2.33

Line Utilization In the Bank market, utilization declined in Q2 ’19 by 70 basis points to 45.0% from 45.7% in Q1. It’s important to note that Q1 utilization was

Utilization

2.11 2.17

Hiring Expectations

2.26 2.27