Gaining traction

UK-based lender Burdale Financial last month provided a £30 million (€36.4 million; $50.0 million) financing package to waste management group FCC Environment UK as part of an asset-based senior secured credit facility. FCC was Wells Fargo-owned Burdale’s third new client since December 2013, and took its total of credit lines advanced to £100 million.

The FCC deal demonstrated the increasing popularity of a form of debt financing that, although well-established in the US market, has until relatively recently failed to match expectations in Europe. That, however, is changing.

Maurice Benisty, chief commercial officer at GE Capital International, tells Private Debt Investor: “It’s really been in the last couple of years and the new market environment that we have started to see increased interest in the product.”

The UK and Ireland’s asset-based finance sector, the umbrella under which this type of lending falls, experienced its best quarterly performance since the recession in the last quarter of 2013 (October to December 2013), according to figures from UK trade body the Asset Based Finance Association (ABFA).

Total funding advances to clients hit £18.3 billion in the fourth quarter last year, the highest quarterly balance to date, according to an ABFA statement at the end of February. In Q2 2009, this figure was £13.9 billion, so the growth since then equates to 32 percent.

Sales turnover from companies using asset based finance also reached a record breaking £275 billion, a growth of 10 percent year on year. Increasing from £211 billion in 2010, this represented a cumulative growth of 30 percent “underlining just how much asset based finance has supported UK and Irish firms with their sales growth since the financial crisis,” the statement read. It remains to be seen, however, to what extent sales growth was driven by other factors.

Kate Sharp, chief executive at ABFA, tells PDI: “Over the last few years the phrase [asset-based lending] has been used to describe a structured financial package based upon the values of both current and fixed assets within a company’s balance sheet.

“In the UK there are two well-known receivables-based products; invoice discounting and factoring. Both products provide a business with the ability to draw money against its unpaid sales ledger,” Sharp says.

However, there is a third product under the ABL umbrella emerging where discounting and factoring are treated as revolving cash flow facilities and other assets within a business can be secured.

“ABL solutions would normally offer a combination of a revolving cash flow facility based upon the receivables and stock and an amortising loan secured on other assets within the business,” Sharp says.

“ABL tends to be more of an option for mid-sized and larger businesses. It delivers sophisticated solutions for a variety of scenarios including growth, MBOs, MBIs, M&A, refinancing, turnaround, and public-to-private transactions,” she says.

Adam Johnson, head of corporate structured finance at GE Capital, UK tells PDI: “It’s a broad universe and at the smaller end traditional lenders in the UK provide domestic SMEs with invoice discounting and factoring rather than the full suite of ABL solutions.”

At the mid and larger end of the market, ABL is provided by institutions including GE Capital, PNC, Burdale Financial and RBS.

Steven Chait, managing director at Burdale, says ABL matches well with companies in the manufacturing, distribution and retail sectors in particular: “It is very well suited to customers that carry lots of stock and debtors. It’s not a leverage-type of deal. It’s driven by asset value rather than EBITDA. And as companies come out of the recession and begin to spend money on capex, they realise that ABL is a great way to finance expansion.”

Facilities are typically tied to accounts receivable, stock, machinery and equipment and real estate. “More often than not receivables are the core asset – a company’s trade debtors. Receivables-based financing is predominately leading the growth,” Johnson says.

Of the £18.1 billion balance recorded by the ABFA, pure invoice financing accounted for £14.9 billion, increasing 31 percent from £11.4 billion in June 2009. ABL accounted for £3.4 billion, increasing 40 percent from £2.4 billion.

Interestingly, ABL against plant and machinery increased 579 percent from £57 million to £387 million, indicating that albeit small, financing against other assets also is growing significantly. 

There has also been a shift in the size of the businesses using asset based finance. From June 2006 to December 2013, the number of companies in the UK and Ireland using asset based finance with annual turnover of more than £100 million increased from 211 to 335 representing a 59 percent rise. The number of companies with less than £500,000 annual turnover using ABL dropped 21 percent, however.

Over the past year Johnson has seen a broader take-up of the product by a more diverse range of industries and through increased product knowledge, acknowledgement of ABL as essential capital structure componentry from an expanding private equity investor base.

GE Capital’s Benisty says, “We have certainly evidenced an increased penetration of private equity sponsors using ABL in the UK and Europe.”

ABL is often considered a viable funding option for working capital, transactional activity, refinancing without recourse to traditional senior debt markets, and is popular with asset intensive industries and for businesses undergoing a capital restructure.

In terms of rival financing options, Johnson says: “ABL typically competes with revolving credit and overdraft cashflow facilities but importantly complements high yield, institutional term debt, mezzanine and subordinated debt instruments in capital structures.

ABL is certainly attractive in terms of its flexibility, pricing and ability to free up significant amounts of financing, Sharp argues. 

“No other form of finance will provide as much cash against a firm’s assets,” she says. “A receivables-based facility generates far more funding, probably in the region of twice as much as an overdraft. Funding via asset based finance is invariably directly related to sales growth and so grows in-line with the business.”

Johnson also believes pricing can be attractive. “It’s company-specific of course but ABL provides competitive pricing and is typically a cost effective form of financing.” he says.

Benisty adds, “ABL offers a financial solution that more accurately reflects the way a business performs. Financing is linked to working capital variation rather than a fixed amount from day one.”

It’s a market not without its challenges, however. The senior debt market is traditionally revolving credit and overdraft-focused, and companies looking to ABL as an alternative form of financing for the first time often need to adopt a new mindset, with reporting to the lender becoming a lot more frequent than they might be used to – on a monthly or even weekly basis in some cases.

This has the positive corollary of increasing operational discipline at the borrower, however, and frequently ABL is cited as a necessary financial discipline in improving working capital efficiency.

The industry then is showing encouraging signs in the UK, as Chait says. “ABL has been adopted in the UK and it’s a growing product. We are trying to mirror what goes on in the US to make it more mainstream in the UK. With a lot of the banks retreating, it allowed us the opportunity to enter the market and be very active. The pipeline is pretty robust. ABL is starting to be recognised as a good alternative product.”