Debt Advisory: Asset Based Lending- Clearwater Corporate Finance
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 Mark Taylor, Clearwater Corporate Finance
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Asset Based Lending (ABL) and Commercial Finance advances totalling £18bn are forecast for the UK this year, up 9% on 2012. But with low levels of awareness amongst businesses, what is it and what are the pros and cons? This type of funding comes from banks and specialist funders who take assets as security against a loan. For Commercial Finance this will be invoices or debtors and for Asset Based Lending this can include plant and machinery, property, stock, trademarks and intellectual property. The company’s debtor book is the most commonly used asset type as it is easy for funders to monitor the on-going performance of the business and expected future cash flows. Asset Based Lending was originally launched in the US as a structured solution to assist with working capital funding. The most popular industries for Asset Based Lending are engineering, manufacturing, wholesale, distribution and services. Current uncertainty about the economy has meant it is harder to obtain finance from traditional lenders. As an example, overdrafts provided on the basis of historic information may not be flexible enough for future financing needs. Asset Based Lending provides the advantage of growing as the business grows, often generating a higher level of funding (based on asset values) than traditional bank funding. Over the last several years, Asset Based Lenders have become increasingly sophisticated and are able to offer committed funding lines to businesses. Along with working capital and refinancing, an Asset Based Lending structure can be used for growth, acquisitions, change of ownership, capital expenditure or restructuring. It often provides a more flexible solution to financing that can release funds against a wide range of assets. Due to the secured nature of the funding, it is possible to raise additional senior debt over typical bank funding levels, providing an injection for businesses with no dilution of shareholder equity. Also, the funder will look at the strength of the collateralised/secured assets first and to a lesser extent at the strength of the company to ensure repayment. This can be very advantageous to those companies with a strong debtor book for instance and can lead to lower interest rates than from traditional bank funding. Invoice finance is not suitable for every business though. As the finance is sales driven, when sales grow the funding grows as well. When sales fall, however, so does the funding to the business. This can cause liquidity issues for businesses operating in a declining market. It should also be remembered that assets are pledged to the funder under Asset Based Lending and there can be higher associated costs, with regards to asset valuations and also with administration of the facility. With continued evidence of traditional bank funding remaining constrained, we view Commercial Finance and Asset Based Lending structures as a real alternative for many SMEs and mid-size corporates. Funders do find Asset Based Lending and Commercial Finance attractive from a capital adequacy perspective; therefore we will see this debt product offered in preference to more vanilla working capital funding. Asset Based Lending is not always an appropriate form of funding given that some assets are not deemed suitable security. In May, packaging manufacturer Excelsior sealed a £13m Asset Based Lending refinancing deal with the assistance of Clearwater’s debt advisory team, led by Partner, Mark Taylor and Director, John Clarke. Excelsior is one of the largest independent flexible packaging manufacturers in the UK, whose customers include Birds Eye, Haribo, Premier Foods and SC Johnson. Last year the £44m turnover company was acquired by private equity firm Growth Capital Partners LLP. The £13m facility consists of working capital and term loan funding secured against the company’s receivables and fixed assets. For this successful private equity backed business, a bespoke cross-Atlantic Asset Based Lending structure was the most appropriate and provided a complete debt solution. Asset Based Lending is becoming increasingly common in the mid-market and is often a good way for businesses to secure flexible funding to meet their requirements, at a competitive price point. We expect to see further adoption of this type of structure in the future. Clearwater is an award winning mid-market corporate finance advisory firm with a market leading research and origination capacity. Our debt advisory team is made up of experienced corporate bankers with a wealth of knowledge of the debt and capital markets. More articles in
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