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Asset Based Lending

Reviewing Trends, Structures, Documentation & Topical Issues

Asset Based Lending Training Course

A one-day course

  • The trainer is a Senior Consultant to Grant Thornton in Debt Advisory so is actively engaged in advising on deals involving ABL and other debt products
  • He recently advised two major banks on structuring inter-creditor arrangements in relation to ABL and term debt (a hot topic in Europe)
  • The course has been presented to various organizations (e.g. Banks, Debt and PE Funds and Advisors) which gives him insight into the challenges facing players in the ABL market
  • His career also includes stints in commercial and investment banking, accountancy, tax and law providing insight from a wide range of perspectives

  • Gain an appreciation of asset-based lending (“ABL”) in tandem with other funding sources
  • Understand when ABL is and is not suitable, as well as the choice of funding
  • Be taught about the key inter-creditor issues applicable for ABL
  • Have explained the financing accounts receivable (“AR”) in ABL
  • Learn about the key relevant issues in inventory and plant, machinery and equipment
  • Learn about the relevance of ABL to real estate, including a comparison with specialist lending
  • Receive an overview of a typical term sheet and commentary thereon

Introduction

  • Two approaches to the credit decision
    • Cash-flow based lending
    • Asset-based lending
  • Asset-based lending defined and compared with other asset-related finance techniques
    • Asset-backed lending
    • Asset Finance compared
  • Comparison of funding options
    • TLB vs HYB vs Cash flow vs RCF
  • Which types of business are suitable for ABL
  • Which types of firms are not suitable for ABL
  • Two key concepts in ABL
    • The “borrowing base”
    • “Headroom”
  • Use and application of ABL
    • M&A
    • Restructuring
    • General corporate purposes
    • Other

ABL in tandem with other funding sources

  • ABL and traditional senior (bank) loan facilities
  • ABL & high yield bonds (q.v. review of Algeco Scotsman)
  • ABL & Unitranche

Key inter-creditor issues for the ABL

  • Security – resolving the conflict over competing claims for collateral
    • Review of various approaches
  • Enforcement Standstills – resolving conflicting agendas with other lenders
  • Option to purchase – does it help
  • Consents & Waivers
  • Case: Review of key conflict issues between ABL and other funders

Financing accounts receivable (“AR”)

  • The basic approach
  • Loan vs debt purchase structure
    • Confidential Invoice discounting
    • Disclosed Invoice discounting
    • Full-service Factoring
  • Key differences between discounting and factoring
  • The key benefits of ABL
  • Critical legal issues for lenders
  • Key accounting issues – off-balance sheet or not requirements
    • Recourse vs Non-recourse
    • Credit insurance – key issues and tips
  • Ineligible AR – review of typical ineligible
  • Other typical limits
    • Permitted territories
    • Permitted currencies
    • Debtor concentrations
    • Export concentrations
  • Typical Reserves
  • Calculating the advance
  • Case: Calculate the effective Advance rate on AR

Inventory financing

  • What types of inventory qualify
    • Finished goods
    • WIP
    • Raw materials / Commodities
    • Typical list of ineligible stock
    • Calculating the Advance
    • Gross Orderly Liquidation Value
    • Net Orderly Liquidation Value
    • Reserves
    • Typical reserves
    • Prescribed part
    • Employees
    • Preferential creditors
    • Landlord’s “distraint”
  • Retention of title issues – “simple” vs “all monies”
  • Key risks for the lender
  • Specific issues with “branded” products

Plant, Machinery & Equipment

  • What types of PME qualify
  • Key concerns for the lenders
    • Ability to sell & relocation
  • Advance rates
  • Pros and cons of other forms of funding (leasing, vendor finance)
  • Key terms of the facility
    • Margins, amortisation & tenors
  • Funding PME on a revolving (inventory) basis
  • Legal issues – Taking adequate security
    • Plating (why it isn’t always an option)

Real Estate

  • What types of property qualify
  • Advance rates
  • Valuation issues
  • Key terms of the facility
    • Margins, amortisation & tenors
  • Pros & cons of using ABL vs specialist lenders
  • Legal issues – Taking adequate security

Other matters - overview

  • Intangible assets - the rationale for leveraging intangibles (unlocking hidden value)
    • What types of intangibles qualify
  • Cash-flow based loans
    • Typical terms
    • Potential pitfalls for the parties
  • Case: Create a funding structure using ABL

Reverse Factoring / Supply chain financing

  • Overview & Rationale
  • How it helps buyers leverage their credit rating
  • Impact on operating cash flow
  • Impact on Net Debt

Documentation: an overview of a typical term sheet

  • Review of main headings
  • Security package
  • Information & Reporting requirements
  • Financial covenants
    • Why and when
  • Operational undertakings
    • “Dilution” defined
  • Reps and Warranties – typical
  • Events of Default
  • Fees and charges (one size does not fit all)
  • The lender’s approach to margin, fees and charges
  • Other costs and expenses
  • Exit/termination fees
    • “typical” fees – review various options
    • Typical triggers
    • Issues for Borrower’s to consider (potential pitfalls)

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring a number of high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross border M&A team prior to being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in a number of deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on their privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons) at UNISA.

Asset-based lending (“ABL”) has been a well-established part of the financing environment in the U.S. for many years and has seen increasing volumes globally.  Despite this ABL has struggled to gain the same level of acceptance here for three reason; first, a lack of familiarity, if not confusion, with the product; second, borrower’s reluctance to abandon their traditional-bank led facilities and last, the dated perception of the product. These headwinds are abating and 2015 has seen record issuance in Europe as borrowers, both corporate and PE, are increasingly recognizing the multiple benefits of ABL, not least the increased flexibility and reduced cost vis-à-vis RCFs.

In practice, the credit markets adopt two distinct approaches to a credit decision: a cashflow based approach and an asset-based approach which includes asset-based lending. Most lenders are familiar with the former but not the latter. Moreover, ABL is often confused with other asset-related financing techniques especially asset-backed lending and asset finance. In simple terms, ABL is a form of secured lending where loans are advanced against specific assets. The main focus is on working capital, although ABL also extends to hard assets such as plant, machinery and equipment, real estate and, more rarely, intangibles.

This programme provides practitioners with a practical toolkit to understanding ABL from the perspective of borrow, advisor, supporting professional and lender.  It covers the key assets to which ABL is applied and the typical terms and conditions applied to each class. It also identifies the pros and cons in each asset class such as, for example, retention of title in the case of inventory and ineligible items in the case of accounts receivable.

In the U.S. market ABL is frequently used along-side with other forms of lending (especially high yield bonds) and this is partly true of Europe, however, thus far inter-creditor have inhabited these structures from evolving in Europe although these problems have been addressed by asset-based lenders who are adopting an increasingly borrower-friendly approach in order to gain market share. For the same reason, ABL is also more willing to up their ABL facilities with cash-flow based facilities

The programme will include a number of hands-on cases illustrating ABL in practice which will provide a practical angle to the topic and reinforce the learning experience.

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