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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