Once seen as the 'lender of last resort', we increasingly see asset-based lenders concluding some of the largest and most high-profile deals in the Scottish market.
Assets and Benefits
Asset-based Lending (ABL) can be utilised in a multitude of situations. Whilst some lenders are becoming increasingly sophisticated in lending across the whole balance sheet, most (if not all) will still offer facilities based on invoices, inventory and plant and machinery. Quality asset bases of these types can allowan ABL lender to offer higher leverage than traditional term debt with fewer covenants and often results in much lower pricing for the borrower.
Suitability for Borrowers and Sponsors
Availability under an ABL facility automatically adjusts to expansion or contraction in the underlying business. This can make the product useful for businesses which operate in cyclical areas, where a traditional leverage covenant might be breached at certain times of the cycle. This feature also makes it an ideal fit for businesses in growth mode, making it particularly attractive to financial sponsors.
Sponsors also benefit from differing attitudes of ABL Lenders as compared to traditional lenders; largely due to the collateralised nature of the lend. For instance, ABL Lenders are often happy for sponsors to take money out on day one or for distributions during the life of the facility, provided that these are correlated to borrowing base headroom.
The discipline instilled in management teams by ABL Lenders' requirements for closer monitoring of underlying assets can be an additional benefit of ABL to sponsors as it ensures better balance sheet management.
Utilisation of ABL
ABL can be utilised for M&A and capex; however it is possibly best suited to refinancings or situations where there is no 'event'. These areas have less time pressure to complete and can therefore allow the ABL Lender to conduct the in-depth diligence required for the product.
That said, ABL has found a home for itself alongside debt funds; which have the appetite to provide term debt but are less able to make working capital available. Where we are likely to see growth is in situations where ABL lenders can become more innovative in working alongside credit funds to provide alternatives to more traditional debt structures.
Progress will, of course, require cooperation between lenders to unify the terms on which ABL is made available with those seen in the wider market. Borrowers will look to more sophisticated ABL documentation with terms that mirror those of their term loans or bonds, with only specific adaptations for the ABL piece. Prizes may well, therefore, go to lenders who are able to offer ABL as part of an integrated capital structure.