IN THE FIRST IN A MONTHLY SLOT ON ASSET-BASED LENDING (ABL),
FACTORING AND INVOICE DISCOUNTING, KATHERINE GREGORY REVIEWS WHY
ABL IS THRIVING AMID THE CHAOS OF THE CREDIT CRUNCH
In times of financial crisis often a new form of funding emerges
from the members of corporate destruction. In the wake of the
current credit crunch it is asset-based lending (ABL) that has
reared its head and become a friend to troubled, debt-exposed and
underfinanced companies across Europe.
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An offshoot of more traditional debt funding services, such as
invoice discounting (ID) and factoring, and a baby of the US
lending and private equity markets,ABL has only began to make a
name for itself in Europe over the past five years or so, and is
still in its infancy. “It’s still something that people aren’t
aware of yet, so it’s a market that’s untapped and has lots of
potential, ”Kate Sharp, CEO of the UK’s Asset Based Lending and
Financing Association (ABFA), says.
Market potential and the low default risk associated with the
product has seen independent companies, such as JP Morgan, GE
Commercial Finance, GMAC Commercial Finance and KBC Business
Capital, as well as banks including Lloyds TSB Commercial Finance,
Bank of America, HSBC Invoice Finance and RBS Invoice Finance, take
it up with gusto.
Financial borrowing
ABL in its pure form involves banks and finance houses providing
structured working capital and term loans that are secured against
the borrowing company’s assets, such as plant and machinery,
property, inventory and receivables. If the borrowing company
defaults then the assets are repossessed by the lender. This has
proven most popular with companies experiencing great change and
needing to refinance existing loans, to finance growth, or for
M&As, MBOs and MBIs.
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By GlobalDataGenerally, however, ABL refers to a package of structured
debt-lending facilities, which includes the more established
products of invoice discounting and factoring on top of the secured
lending.
Whilst the majority of companies, including GMAC, GE, Lloyds TSB
and Venture Finance, do a mixture of asset-based lending, invoice
discounting and factoring, others – including JP Morgan,
Landsbanki, KBC and Burdale Financial (part of Bank of Ireland) –
provide ABL in its pure form, i.e. in deals involving no ID or
factoring, but simply where there is a loan secured on an
asset.
The ABL market in the UK has seen unprecedented growth of about
12 to 13 per cent year-on-year, according to ABFA. In 2007 ABL
providers advanced over £15.8bn in the UK and Ireland, ABFA
calculates, and Eastern Europe is also increasing its demand for
the product
The market is also experiencing consolidation. Last month, for
example, saw the acquisition of Five Arrows’ABL business by GE, and
several continental European players have recently expanded into
new territories.
The past 12 months have been particularly kind to the ABL
market, as credit-squeezed companies and borrowers move away from
traditional funding lines which lack the necessary liquidity and
embrace the higher leverage financing that ABL offers.
The past 12Brent Osborne, managing director at Landsbanki
Commercial Finance, gives a reason for this. “People prefer secured
facilities in bad times,” he remarks. “There has been a downturn in
general leverage lenders, so more and bigger deals are coming into
the ABL market.”
Global sectors
Some sectors, which have been experiencing particular difficulty
in the current climate, are increasingly using ABL, says Paul
Hancock, managing director of ABL at JP Morgan. He says: “These
include the automotive sector, which is stretching to global
overcapacity, experiencing tough margins and constraints such as
emissions controls, as well as the steel-related businesses, where
input prices have shot up.”
ABL also has greater consistency in borrowing rates, which
refers to the percentage of credit that can be leveraged against
the asset, and the ability to provide higher proportions of a
company’s debt needs than ordinary loans. ABL deals can leverage
between 80 and 90 per cent of a company’s debt (receivables
financing) and between 40 to 60 per cent for stock advances, while
the rates for plant and machinery depend on its assessment by a
valuer.
Asset evaluations are central to ABL as they help alleviate
default risk and allow a more sophisticated and confident
calculation of how much money a financier can lend. Compared with a
leasing or hire purchase deal, which advances money on a structured
period and repayment basis, the majority of ABL deals will involve
having the machine or asset revalued and then adjusting the finance
on a revolving facility based against current day values.
Therefore, the smaller the decrease in an asset’s value, the more
funding a financier can provide.
Risky business
ABL also offers a low default risk for the financier because of
a greater spread of receivables and borrowers; in an ABL deal the
funder essentially buys the borrowing company’s assets outright for
security, and is in turn owed returns not just from the principal
borrower, but also the borrower’s clients.
“An ABL deal looks at the status of the borrower’s clients as
well as the borrower, which spreads the risk and a lot of that risk
can also be high quality,” Sharp says.
Furthermore, the positive risk evaluation of ABL that emerged
with Basel II has meant the product provides lower capital
requirements than average for banks and hence greater liquidity and
capital efficiency for the financier.
The ABL market is expected to remain strong for some time to
come. Private equity groups and banks are increasingly pushing into
the ABL market, which will make the volume of deals grow and become
more competitive, Osborne says.
ABL is growing across Europe, particularly in France and Germany
where companies can embrace the flexibility and choice of ABL
following partial de-regulation of the financial services markets
and the implementation of Basel II. Eastern Europe may be next, as
invoice discounting starts to increase in popularity across the
region, Sharp says.
