President’s Message (July 2018)

I mentioned in my January letter that we had plans to expand in the southeast this year. I’m pleased to report that we brought a new Client Development Officer on board in March and he’s doing well. He’s based in Atlanta; he’s an experienced industry veteran having been with a competitor in our niche market; and I’m very pleased with the hire.

In terms of how Celtic Capital has performed during the first half of the year, leads are up, fundings are strong, and proposals are up but the percentage of proposals to closings are down. In analyzing the proposals not accepted, we found the overwhelming reason why was that companies were either going to banks or were waiting on banks. Some were probably SBA loans which we’ve seen as a rampant competitor over the past few years. Some of these loans have been to marginal borrowers and I’m concerned that without close monitoring, they may become longer term problems for the more aggressive banks.

We came into the year in the midst of a couple of small liquidations. All have been successful though extremely challenging. Through patience and perseverance, we eventually collected everything owed and came out whole.

In general, our business has been fairly robust so far this year. Sales are trending up (slow and steady) and the companies we’re financing have generally become a little healthier, too. We’ve also seen an uptick in the number of equipment-only deals referred to us as factors and other asset based lenders that don’t have an appetite for financing equipment know that we’ll partner with them for that piece of a deal.

Over the past eighteen months or so, M&A activity in the industry has been increasing. We’ve seen competitors (other small asset based lenders) acquired – some by banks, some by equity groups – and probably a fair percentage of those have been acquired by organizations that are expecting growth. This tells me that over time, the finance company will trend to looking at the larger transactions as it’s hard to grow when you’re looking at $500k and $750k transactions. In my opinion, that will be good for Celtic Capital as there will be fewer players in our space.

The Fed has increased rates in the first half of the year and the expectation is that we’ll see one to two more in the second half of the year. This will put additional pressure on marginal bank borrowers. Smart banks are looking at those marginal deals now and saying that with rates continuing to rise, these companies will see a strain on cash flow so maybe banks need to be exiting those deals now, before there’s a larger problem. The longer banks wait, the worse shape these companies will be in and it will be harder to get them out.

I believe the market will remain highly competitive for the remainder of the year; some regions of the country more competitive than others. Every month to date, we’ve seen average outstandings for each month increase. While the summer months are typically slow, I think we’ll see a lot of activity during the last four months of 2018 and Celtic Capital should see a 10%-15% year over year growth in our portfolio.

In closing, I hope your year is shaping up to be successful, and if we at Celtic Capital can be of assistance to you with any deal from $500,000 to $5 Million, I hope you’ll give us a call.

Mark Hafner
President & CEO
Celtic Capital Corporation