Recent Trends in Asset-based LendingBanker Resource
October 29, 2012 — 1,668 views
Recent Trends in Asset-based Lending
Asset-based lending (ABL) has existed for decades. It has evolved over time from very basic with few alternatives to a first-lien/second lien combination to bifurcated collateral loan structure. Historically, the asset-based lender was regarded as a last-resort lender for those with credit issues. However, the recent lingering economic downturn has led to even more changes in the asset-based lending market.
Slow Economy Yields Growth
The slow economy has led to growth in popularity in ABL. One industry analyst noted that asset-based loans doubled in 2011 to more than $100 billion. A large percentage were refinancing deals. Asset-based loans work best with asset-rich businesses heavy with accounts receivable and inventory including food and beverage, retailers, services, and oil and gas to name just a few. It has become mainstream in commercial financing and it is now considered a viable option for large corporations, among them Del-Monte, Sears, and Hertz. The relationship between Sears and asset-based lending dates back to 2009, when it was the largest asset-based deal in the market.
Types of ABL Financing
A core asset-based structure works best for a company that has a good base of sustainable cash flow. Additionally, the availability of fixed-assets such as real estate are desirable.
Collateral dependent structure exists where the borrower has a large amount of working capital assets but relatively little operational cash flow. Here the lender requires enough liquidity to support operations during restructure and a turnaround plan.
Stretch asset-based loans are available following a successful turnaround.
Structural changes in ABL structures include the longevity and extent of collateral over-advances, frequency of inventory appraisals, and allowance of sponsor dividends. Asset-quality is increasingly important since loan collection relies of asset liquidity. Asset eligibility tests are common with minimum required eligible-asset cushions of 10 - 15%. If availability falls below a specified level, a fixed charge ratio may apply. Dividends for cash flow deals fast becoming the norm for large deals and small as long as the fixed charge and excess availability tests are met.
One result of the success of asset-based lending is the means to increase a company's borrowing capacity by means of a junior secured loan. This product is secured by a second lien against the company's assets. The security interest of a junior lender is secondary to that of the senior lender along with the rights to move against the borrower.