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Asset Based Lending – A knight in shining armour?
08 September 2008
In the midst of the credit-crunch and the uncertain business
environment, asset based lending (ABL) seems set for further growth
as businesses in the Midlands find mainstream financing options
harder to come by.
ABL, by its very nature, is an ideal funding
solution in difficult times and in an uncertain business
environment. Given the present climate, a company’s asset
base or collateral is likely to be far more certain than its
cashflows and financial performance. It is therefore widely
predicted that ABL will grow significantly in the current climate
and will fund more leveraged transactions in place of traditional
cashflow lenders. Whilst 18 months ago ABL was often a
component part of larger leveraged transactions, it is now likely
to become an essential element of these deals.
There is also potential
for more take-private activity with the stock markets at
historically low levels. Where listed companies have a strong asset
base, which may mean that its asset value is greater than its
market cap, this opens up opportunities for asset based lenders to
fund take-privates.
As well as being
potentially more readily available than cashflow loans, asset based
facilities offer a number of potential benefits to borrowers.
In the
credit crunch era, pricing is a key issue with certain funders and
banks having introduced an additional layer to their credit
committees which specifically signs-off on pricing.
ABL financing as a general rule of thumb, may
also be less expensive compared to cash-flow or term loans.
With the introduction of Basel II which sets out capital adequacy
requirements for banks, ABL is likely to become more attractive as
lenders are required to hold less capital in relation to ABL
facilities (which are secured against borrowers’ assets).
This should translate in lower pricing and a greater demand for
ABL.
Such funding structures
and products have evolved significantly over the past few years
into sophisticated funding packages which allow lending against a
range of assets including real property, plant and machinery,
intellectual property and stock as well as receivables. As
part of the funding package, asset based lenders are also often
prepared to lend against cashflows.
ABL facilities tend to have fewer financial
covenants (e.g. cashflow and interest cover covenants) than term or
cashflow facilities, which reduces the potential for the borrower
to be in breach and gives the borrower greater flexibility to run
its business. Whilst there can be daily
reporting and frequent monitoring of ABL facilities, this can often
be seen as beneficial and provides discipline to the borrower
internally and improves internal systems.
In addition, ABL provides
flexibility and can grow as the business expands as compared with
the traditional debt structures which may not be able to provide
such flexibility. We are also seeing borrowers
and venture capitalists increasingly concerned to see that ABL
facilities are committed. For the most part, in the past ABL
facilities have been “on demand” which allows the lender to demand
immediate repayment or change the commercial terms of the facility
for any reason and at any time. There has been a move
in the market amongst certain lenders to offer more committed ABL
terms, particularly if the facilities are being used to fund an
acquisition or a management buy-out.
ABL is, of course, only
available to asset rich companies or those with assets which are
fundable. Historically, the assets which have been funded
have in the main been book debts, plant and equipment and
stock. We have though seen increasing demand to use
non-standard collateral such as intellectual property which
represents a real challenge to the lender in terms of
valuation. With lenders treading with greater care, it
will be interesting to see if they will have the appetite to lend
against these assets or will revert to more standard fundable
assets where is it safe.
Despite these
challenges, it seems clear that ABL as a form of lending will
continue to flourish this year. Improving knowledge of ABL
amongst professional advisers and what it can offer to corporate
borrowers should ensure this growth.
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