"The global pandemic posed formidable challenges for specialty finance lending in 2020, but also demonstrated the sector's resilience," said Rian Emmett, Managing Director and Group Head of KeyBank Specialty Finance Lending, during a recent podcast interview for the Refinitiv LPC Lender Spotlight Series podcast.
In speaking with host Ioana Barza, Refinitiv LPC's Head of Analysis, Emmett described the specialty finance lending environment both before and after the global COVID-19 pandemic.
Here are a few highlights from the interview, which can be heard in full here.
The past decade "a very good run"
Ten years ago, KeyBank recognized it had small portfolios in certain asset sectors that were performing quite well during the recession (middle market loans, transportation, equipment finance and leasing, asset-backed lending, growth capital, timeshare, home improvement). At the same time, there were very few lenders that had platforms to support specialty finance lending.
KeyBank Specialty Finance Lending now syndicates to more than 70 banks.
"When coming out of the recession, you could've counted the reliable and committed participants in the sector on two hands," Emmett said. "It has been a very good run."
In early 2020, KeyBank (like most other banks) was coming off of a record performance in 2019.
"We started the year off with a bang," Emmett said. "We had a significant backlog in excess of a billion dollars. Our portfolio was performing very well. And then COVID hit – and the world changed."
With pandemic, banks press "pause" button
As the coronavirus spread, it brought about a rapid onslaught of complete uncertainty—across the United States and entire globe. KeyBank, like most lenders, hit the pause button.
"We hit it hard," Emmett said. "We wanted to focus on our clients as well as each of the underlying portfolios. And new businesses took a backseat. There was no other choice."
The "pause" approach was important because it ensured focused attention on how portfolios would perform during the downturn of COVID-19. With that pause began the process of communicating with each client to understand their liquidity position and the extent to which each of the underlying portfolio borrowers were impacted by the pandemic, directly or indirectly.
Emmett has been impressed by how KeyBank's clients reacted during the process, as well as the lenders' approach to working together and with their clients. "The communication process has been really strong." he said.
Amendments: One size doesn't fit all
While the pandemic response has required amendments for many loan facilities, clients and lenders have collaborated on thoughtful give-and-take solutions.
"Here at Key, we've touched more than 30% of our portfolio by commitment," Emmett said, "but none of the amendment activity has been for payment deferrals or defaults. It's been almost entirely attributed to these structures allowing clients to work with their underlying borrowers."
KeyBank has adjusted and worked with clients until the market opened back up, "and it certainly has," he said. "At this point, the amendment activity has really subsided quite a bit."
Emmett said the impacted portions of these portfolios are now emerging and regaining their footing. "Has there been some carnage? Sure. But it has been manageable by our clients, and despite not being clear of the COVID impact by any stretch, we feel there's enough certainty ... that we now have a path forward."
Lessons from past recession inform outlook
"KeyBank clients have shown an extreme amount of resiliency, and the COVID impact to underlying assets has been limited and manageable," Emmett said.
Making a positive difference is attributed to:
- Having the right clients
- Diversity in underlying portfolios (by industry)
- Liquidity is very important
"You can't not recognize the abundance of liquidity that was pumped into the economy by the government as well," Emmett said. "I think, also, that's another lesson learned when compared to '08-'09. The government stepped in here at a level, that was, maybe five to six times greater when compared to the capital supplied into the system during the recession. So, that has certainly helped in maintaining the underlying borrower performance."
Lender thoughtfulness also needs to be recognized, he said, because rather than pull liquidity from the market, almost universally lenders listened to the client, and sometimes each other, in developing situations that worked for everybody.
"We've certainly lifted the pause button," Emmett said. "We're all open for business, both for existing and new clients."
Regarding more impacted sectors, such as commercial air, hotels, travel and leisure, the recovery will be slower and more cautious. "But even there," Emmett said, "we expect to see some opportunities, given time."
"In fact," Emmett said, "our pipeline is already approaching pre-COVID levels, and we're certainly excited about that."
Understanding of sector will support growth, convergence
Despite one of the most challenging economic periods in history, Specialty Finance Lending has continued to perform, which will increase confidence and growth in the sector.
"As someone who's been in the space for quite a while," Emmett added, "it is exciting to see this and to think about all the possibilities."
For the full interview: