article
Lending lifeline
23 July 2008
Shaun McCabe and Paul Ray of the Banking Team
at Browne Jacobson
As the credit crunch has seen banks take a
more cautious approach to lending, businesses in the Midlands have
increasingly turned to asset based lending (“ABL”) to fund their
expansion plans.
The ABL industry has grown beyond recognition
over the last decade or so from the perception of “lender of last
resort” with limited funding packages to a sophisticated, tailored
and flexible method of funding. According to the Asset Based
Finance Association, more than £15 billion was advanced to almost
50,000 UK companies by the ABL industry in the third quarter of
2007 alone, a 15% rise on the same period last year. The
growth of ABL has largely been as a result of benefits it has over
more traditional forms of lending.
One of the key developments in ABL has been
the diversification of products offered by banks and other
funders. In addition to debtor only products, like invoice
discounting or factoring, asset based lenders now provide funding
against other asset classes such as property, intellectual
property, stock and plant and machinery as well as different
methods to fund those assets – e.g. sale and leaseback, hire
purchase, operating leases etc.
ABL has also become increasingly popular as it
provides working capital which is flexible and grows as the
business expands compared with traditional debt structures which
may not be able to provide such flexibility. It can also be
tailored to the assets of the company and is able to take into
account issues such as seasonality of a business. Providers
of ABL have also been able to venture outside their traditional
sectors, such as recruitment, printing and manufacturing. For
instance some funders have developed products especially tailored
to the construction industry. Asset based lenders have also
broadened their appeal by offering ancillary services (e.g.
payroll, invoicing etc) which small and medium sized businesses
have found useful.
As awareness of ABL increases, the products
offered by asset based lenders have become more and more
sophisticated. Larger transactions have seen club or
syndicated ABL facilities (for instance ABL was a major part of the
recent secondary buy out of Brittons Group). There have also
been a number of high profile cross border deals involving ABL. As
a result, ABL has been used in increasing creative and innovative
ways to fund businesses and deals.
We have seen greater acceptance of ABL amongst
the private equity providers, especially where the lender is
prepared to agree to provide committed funding lines rather than
the traditional “on demand” facilities.
As well as the potential benefits of ABL,
companies (and their finance directors) need to take advice and
consider all of the factors which may influence their funding
decisions.
With the introduction of BASEL II (which sets
out capital adequacy requirements for banks) ABL is likely to
become more attractive to lenders as they are required to
hold less capital in respect of ABL facilities (which are secured
against the borrower’s assets) than is the case with other,
unsecured lending. This should translate to lower pricing for ABL
and therefore increase demand for these facilities going forward
particularly if economic conditions continue to tighten.
ABL facilities can also involve rigorous
valuation and inventory and receivables monitoring, sometimes on a
daily basis. It is important for the borrower to understand how in
practice the ABL facilities will be operated before the facilities
are entered into so that they can be operated without excessive
administrative burdens for the borrower. On the other hand, ABL
facilities are unlikely to have complex financial covenants often
found in term loan facility agreements (e.g. cash flow covenants,
interest cover) which require regular monitoring.
Term loan and revolving credit facilities are
often committed facilities. In other words the bank is committed to
provide these unless a default occurs. For the most part ABL
facilities are “on demand” which allows the lender to demand
immediate repayment or change the commercial terms of the facility.
Having said this, we have noticed in the market certain lenders
being prepared to offer more committed ABL terms, particularly if
the facilities are being used to fund an acquisition.
ABL is only available to asset rich companies
or companies with assets which are fundable. Therefore it is not
always suited to a particular deal or appropriate to certain
businesses. However given its flexibility and the innovative ways
in which it can be used to fund deals it is likely that asset based
lending will go from strength to strength.
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