Collaborate to accumulate: Why ABL unitranche works for businesses and credit funds

Secure Trust Bank's Richard Foote discusses why ABL unitranche may be the solution borrowers and credit funds need following the pandemic and why the sector has to come together to facilitate long-term change.

Traditionally, asset-based lending has been perceived as complex for the borrower and unpredictable for credit funds. However, in the past 10 years knowledge around ABL and its benefits has increased significantly, with more companies opting to use it to support growth.

Now, following the pandemic, the financial landscape has changed and access to funding through the traditional routes is more challenging. As such, alternative lenders have a duty to work together in a new way to support businesses across the UK and provide the platform for growth to help rebuild the economy.

Unitranche

In the past decade, there has been an exponential increase in the use of the classic unitranche structure, whereby a credit fund provides the unitranche and a high street bank would invariably provide the super senior RCF. The popularity of this structure was supported by the strong appetite of the credit funds, market standard legal agreements, such as ICAs, and willingness of banks to provide the RCF. All these factors helped cement classic unitranche as the structure of choice for many borrowers.

Although ABL unitranche is popular in other markets, such as the US, it is less so in the UK and Europe. This is largely due to the perception that ABL providers are less aligned to credit funds’ priorities than, for example, an RCF provider, which could lead to protracted ICA negotiations. However, it could be argued that an ABL lender is closer aligned to a credit fund as it has the security of the asset base supporting its loss given default focus, so will likely be prepared to standstill for longer in the event of default, thus preserving the enterprise value longer term.

As well as being a good option for credit funds, the flexibility of ABL means it can be used in a number of ways, whether that is supporting growth, providing additional leverage, M&A or other event driven transactions or in a bifurcated structure (FILO or FOLO). Independent ABLs have the advantage that they are not tied into legacy credit policies and can approach risk assessment differently, meaning every solution is bespoke to the borrower and situation.

The opportunity

If we can facilitate a change in perception where an ABL’s focus on assets is viewed as a positive, there is a huge opportunity for alternative lenders to work together to create bespoke capital structures for the good of UK businesses and the economy.

A consequence of the pandemic is that many businesses have seen erosion to their P&Ls, resulting in highly leveraged capital structures. As such there is now significant pressure on banks and lenders to decide how they will support borrowers and to what extent.

Many banks have faced challenges due to the pandemic and are choosing to protect their existing portfolios while retrenching from offering new RCFs to prospects as the risk is not considered commensurate with the reward. However, businesses across the UK still require funding to grow, and where the banks are currently unable or unwilling to supply this funding, alternative lenders have an opportunity to work together to bridge the gap.

Moving forward

A number of challenges lie ahead as businesses look to rebuild in the aftermath of covid. The road will not be easy. It is up to the alternative finance and ABL lenders to build closer relationships and help support businesses to overcome obstacles and see the economy thrive once more.

We have a duty to ourselves and our sector to not let misconceptions stand in the way of growth as we have come a long way in the past 10 years. Now is an opportunity to drive change.

The past year has taught everyone to expect the unexpected and, moving forward, borrowers will be looking for structures that can be flexible in the face of uncertainty, as well as partners they can trust to understand their business and create solutions that work for them now and in the future. ABL unitranche is a very compelling option and if alternative lenders can work together and build on the momentum of this moment there is a real opportunity to change the way businesses borrow now and in the future.

Richard Foote is regional managing director at Secure Trust Bank.