Use of asset based lending set to increase during credit crunch
Private equity, corporate finance, hedge funds and businesses now see asset based lending as a better proposition than leveraged finance ABL offers one of few current methods of tackling cash flow issues Lack of liquidity in lending banks mean businesses are increasingly turning to using asset based borrowing New research by the Asset Based Finance Association shows that beleaguered firms across the UK are increasingly using asset based lending as a means of raising funds and capital during the credit crunch.
Asset based lending (ABL) is a form of financing that allows a business to borrow capital against its property, plant, machinery, stock and debtors. In ABL, lenders can share risk by forming large syndicates, or deals can be completed as a single financier.
When surveyed, 64 per cent of respondents, (such as dealmakers in the M&A community, corporate financiers, banks, private equity companies and hedge funds), saw ABL as a mature product, having proven its worth in the market. Of the 45 per cent surveyed, many lenders are considering a switch to ABL and of those ABL deals completed in the last 12 months, the deal values had ranged from £5 million to nearly $1 billion (US dollars), with the added benefit that ABL often assists the way that working capital is managed in a business.
The survey results also show that whereas EBITDA multiples have traditionally been used as a basis for lending, lenders using ABL consider a wider range of criteria when assessing the potential of a company, including asset valuation and the value of trade debtors. Over 60 per cent of those surveyed saw ABL as strong in the current climate for raising new money, offering liquidity, offering a facility for increasingly hard-to-come-by cash flow lending and providing a means by which to “sweat” assets that are idle.
Commenting on the survey, ABFA’s Chief Executive Kate Sharp said:
“The survey points out some important trends. With liquidity and availability of corporate finance almost non-existent, companies and advisors have discovered the benefits of asset based lending as a means to secure medium-term financing. ABL gives a robust method of financing a deal, where risks can be shared and secured against real world, hard assets.”
“ABL’s value in corporate finance has been recognised amongst financiers and businesses alike as very flexible and able to be tailored to almost any business at any stage in its lifecycle, ranging from management buy-out to merger or refinancing or turnaround. ABL is now considered a mainstream form of financing and the fact that loans are guaranteed against corporate assets makes it much more attractive in the current economic climate.”
“In the next twelve months, we are going to see a many more businesses looking for turnaround deals due to underperformance and this is where ABL is perfectly placed to help.”