Media Coverage

Asset-Based Lending’s New Resurgence

Blank Rome’s Lawrence Flick offered his insight in the U.K.-based FinancierWorldwide for the current resurgence of asset-based lending (ABL), an ideal financing tool for companies in tight situations or uncertain business environments.

Eighteen months ago, while asset-based lending was a common component of larger leveraged finance transactions, it was generally eclipsed in such transactions by the cash-flow tranches.  Lenders were structuring such cash-flow debt with little to no security tired to assets, then syndicating strips to cash-rich investors seeking higher returns.  Now that those investors have fled the market, and lenders have revised their criteria, ABL is moving to the forefront.  ABL financing is relatively inexpensive compared to cash-flow or term-loan financing, and has few financial covenants.

“Many borrowers benefit from an ABL structure.  The daily reporting and frequent monitoring is often beneficial and provides discipline to the borrower internally.  In addition, an ABL lender with adequate collateral coverage may not have the same concerns that the borrower is losing money or has violated its financial covenants.  Many ABL transactions will have minimal or no financial covenants—particularly beneficial in an uncertain economy,” explained Mr. Flick.

Since the onset of the credit crunch, when liquidity began to evaporate from financial markets, it has been far more difficult for banks to syndicate loans to willing investors.  As a result, lenders have tightened their credit analysis processes—even for asset based loans.

“The collateralised loan obligations, collateralised debt obligations and hedge funds that have been active participants in the syndication market are no longer active participants in most deals,” said Mr. Flick.  “We have also started to see agents taking on less syndication risk than they were a year ago.  In some cases, commitments have been conditioned on co-lenders or participants committing as well as funding at the initial closing of the loan.  We are seeing a return to true ABL deals with daily borrowing base reporting and lockbox collections of receivables and dominion over cash.”

Mr. Flick added, “The Uniform Commercial Code and the certainty of the laws relating to secured transactions and the relative priority among creditors in the US gives ABL lenders great comfort.  Properly underwritten, an ABL lender expects to be able to liquidate the assets of its borrower and recover its loan in full.  Advance rates are set to reflect the cost and timing of liquidation and expected dilution of collateral.”

“Asset-Based Lending in a Risk-Averse Financing Environment” by Claire Spencer appeared in the May 2008 issue of FinancierWorldwide.

To read the full article, please click on the link under "Materials" in the right-hand column.