Bite Size: Asset Based Lending

Introduction

• Two approaches to the credit decision
  • Cash-flow based lending
  • Asset-based lending
• Which assets are available for ABL
  • Revolving lines of credit
  • Term loans
• Use and application of ABL
• Which types of business are suitable for ABL

Financing accounts receivable (“AR”)

• Different structures
  • Confidential Invoice discounting
  • Full-service Factoring
• Summary of key concepts in AR
  • Eligible Assets
  • The Borrowing Base
  • The Advance Rate
  • Typical Reserves
• Sizing the facility limit

Inventory financing

• What types of inventories qualify
  • Finished goods
  • WIP
  • Raw materials / Commodities
• Calculating the Borrowing Base
• Calculating the Advance
• Gross & Net Orderly Liquidation Value
• Reserves

Other assets available for ABL (overview)

• Plant, Machinery & Equipment
  • What types of PME qualify
  • Funding PME on a revolving basis (e.g. yellow plant)
• Real Estate assets
• Reverse Factoring / Supply chain financing
• Cash strips

Other matters

• “Typical’ documentation
• Security package
• Information & Reporting requirements
• Operational undertakings

Our 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 and a Senior Consultant to Grant Thornton UK.

Training courses 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.

• Types of ABL (which assets are appropriate) – Revolving lines of credit (on AR, inventory and some plant and equipment) are the mainstay of ABL but some facilities can also include term loans over other assets (e.g. real estate, PME, IPR). Our webinar summarises which asset classes are appropriate for ABL-style lending.
• Fundamentals of ABL – ABL approaches lending from a fundamentally different perspective to traditional cash flow-based lending solutions. The programme explains the fundamental elements in structuring an ABL facility; namely, the eligible assets, the borrowing base, the advance rate and the reserves.
• Use of ABL – ABL can be applied to a wide variety of situations (e.g. M&A, traditional corporate lending, expansion and restructuring).
• Pros and cons of ABL for borrowers (Ideal sectors) - ABL offers significant advantages to firms in certain sectors with the appropriate asset base.
• Funding Accounts Receivable (“AR”) – AR lies at the heart of most ABL facilities and typically comprises at least 50% of the total facilities. The training explains the differing approaches to structuring AR and also how a lender's approach derives the facility limits from the eligible assets, the borrowing base, the advance rate and the reserves.
• Funding Inventory – Inventory is invariably the most challenging asset to finance and the parties often need to overcome a variety of issues which can impact (limit) the facility. Our course explains which types of inventories are suitable and summarises the key issues for the parties.
• Other assets suitable for ABL – Some types of plant, machinery and equipment are suitable for a revolving borrowing base (e.g. ‘yellow plant’ & car hire).
• Documentation – Unlike leverage and IG loans, there is no market standard for ABL loans. The course provides a summary of the key commercial terms in ABL.

• Our asset based lending course trainer is a Senior Consultant to Grant Thornton in Debt Advisory. They are actively engaged in advising on deals involving ABL and other debt products.
• The course has been presented to a wide range of firms (e.g. banks, debt and PE funds, law firms and debt advisors) which gives our trainer insight into the challenges facing players in the ABL market.
• The trainer recently advised two major banks on structuring inter-creditor arrangements in relation to ABL and term debt (a hot topic in Europe).
• They have experience in commercial and investment banking, accountancy, tax and law providing insight from a wide range of perspectives.

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 reasons:

• A lack of familiarity, if not confusion, with the product.
• Borrower’s reluctance to abandon their traditional bank-led facilities.
• 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 cash flow-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. 

Our training provides practitioners with a practical toolkit to understanding ABL from the perspective of the borrower, 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 of each asset class. 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 alongside other forms of lending (especially high-yield bonds) and this is partly true of Europe. However, thus far inter-creditors have prevented 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.