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Just about every lender now has an asset-based financing product, sometimes labelled as structured finance. Why? Cost of
capital. A banks cost of capital to be precise. The regulatory framework in 2015 sees ABL products carrying a lower cost
of capital for a bank, as the loan is directly collateralised. All good for the banks and lenders. Good for corporates too? It
certainly can be. Borrowers benefit from a lenders lower cost of capital in the form of a cheaper margin. ABL products are
very flexible and grow with your business. And they go way beyond basic invoice discounting. For CFOs though, buyer
beware. The level of funding available goes down, as well as up, with changes in working capital. If you release a one off
cash benefit from a new or uprated ABL facility, will your return on that cash be value creating for shareholders? Could
you ever afford to not use ABL once you have started?
features of asset-based
2 Favourable
lending
of asset-based lending in
3 Use
transactions
of asset-based lending
4 Types
financing
Asset-backed lending
Asset-backed lending usually involves some
form of securitisation, in which a number of
small, individual illiquid assets are sold by
their originators (usually a financial institution)
to an SPV, which in-turn issues fixed-rate
securities to investors. These asset-backed
securities (ABS) are serviced by the cash
flow from the assets pooled in the SPV,
which also serve as collateral for the ABS.
The types of assets which lend themselves
to these structures are very broad but the
most common examples are receivables
from credit cards, motor vehicle leases and
residential and commercial mortgages.
Asset finance
Asset finance often refers to leasing and
similar structures where the asset is owned
by the lessor and leased to the lessee/
borrower. In many cases, this technique is
used for big-ticket items such as aircraft,
ships and railway equipment, although
leasing is also widely used for a wide range
of much smaller value assets, with motor
vehicles being an obvious example. Some
asset financed deals may also be structured
using a more traditional loan structure.
Balance
Eligible
Advance rate
Maximum
sheet
amount
advance
Set out in the table opposite is a simplified
Accounts receivable
50,000
45,000
90%
40,500
calculation of the eligible assets, the advance
rate, the borrowing base and the headroom.
Inventory
35,000
20,000
55%
11,000
Borrowers should be aware that the maximum
Plant and equipment
20,000
20,000
60%
12,000
advance may not always be available for
Real estate
25,000
25,000
50%
12,500
drawing as lenders may sometimes place an
Borrowing base
110,000
76,000
availability block (suppressed availability)
Amount drawn
60,000
of 10% to possibly 15% on the facility,
Headroom
16,000
particularly in the absence of a Fixed Charge
Coverage Ratio (FCCR). Some lenders use
the borrowing base to describe the maximum Many ABL providers would expect working capital to comprise the
majority of the facilities, with 60% being a good rule of thumb.
amount the lender is willing to advance.
Quick comparison
Aspect
Asset-based lending
Products
Leverage
Security
Financial covenants
Cov-lite deals
Information covenants
and reporting
Permitted investments/
M&A/dividends/capex
Documentation
Liquidity trap?
ABL is predominantly used to help fund working capital, providing liquidity. This liquidity
can be very welcome. It is relatively easy to use and instant. But it can become
permanent and troublesome if used for the wrong purpose. ABL facilities are not
designed to invest in long-term capital projects, be used for amortisation of term debt
or to fund losses. But the instant liquidity can make it very tempting for companies to
use ABL for non-working capital purposes.
Cash availability under an ABL facility can go down as well as up. The borrowing
base is constantly changing; it is, after all, a revolving facility. On a frequent basis, the
CFO recalculates the borrowing base. If the borrowing base has increased, more can
be drawn down from the facility. If the borrowing base has decreased a low point in
the working capital cycle then the CFO may have to repay some of the facility. The
CFO has to make sure the funds are available. If cash receipts have been used for
another purpose, this creates a problem. Borrowing short to fund long is the cause of
many a corporate crisis.
990
3. Undrawn
commitments
940
1. Seasonal peak
funded by RCF?
930
920
Total RCF
880
820
820
820
820
820
820
820
820
820
800
760
700
Ja
15
n'
b
Fe
'15
Ma
5
r '1
Ap
5
r '1
Ma
15
y'
Ju
15
n'
Ju
5
l '1
Au
2. Core
(normalised)
working
capital
5
15
15
15
'15
t '1
v'
c'
g'
pt
Oc
No
De
Se
2 Releases
cash for investment
and dividends
continuity of funding
5 Level
of borrowing
B Disposals
and dividends
Services
29%
Retail
Distribution
29.5%
1.1%
Other
Manufacturing
4%
24.6%
Construction
Transport
Margin
Interest
Amortisation
Debt
Comments
Service
Accounts receivable
22,000
18,000
95%
17,100
2.25%
445
445
Stock
18,000
9,000
80%
7,200
2.25%
187
187
Plant, machinery
and equipment
10,000
6,000
60%
3,600
2.50%
109
960
1,069
741
960
1,701
Total
27,900
Facility size
Leverage
Margin
Interest
Amortisation
Debt Service
Comments
RCF
2,000
0.3x
4.00%
80
80
TLA
8,500
1.3x
4.00%
383
1,700
2,083
TLB
14,000
2.1x
4.50%
770
770
5 year bullet
3,500
0.5x
6.00%
28,000
4.1x
Mezzanine
Total
245
245
1,478
1,700
3,178
Structure 3: ABL financing (as Structure 1, but including real estate assets)
Gross value Eligible Advance Availability
Margin
Interest
Amortisation
Debt Service
Comments
Accounts
receivable
22,000
18,000
95%
17,100
2.25%
445
445
Stock
18,000
9,000
80%
7,200
2.25%
187
187
Plant, machinery
and equipment
10,000
6,000
60%
3,600
2.50%
109
960
1,069
Real estate
10,000
8,000
60%
4,800
3.25%
177
1,280
1,457
918
2,240
3,158
Total
32,700
Accounts receivable
Gross
value
Eligible
22,000
18,000
TLA
Interest
Amortisation
Debt
Service
17,100
2.25%
445
445
4,500
4.50%
223
900
1,123
Comments
May be in form of CID; 80% average utilisation pa
Fully amortising over 5 years
TLB
7,000
5.00%
420
420
5 year bullet
Mezzanine
4,000
7.00%
320
320
1,408
900
2,307
Total
32,600
Structure
Assumptions
EBITDA
6,800
Credit statistics
CFADS
3,840
Leverage (c)
4.1x
4.1x
4.8x
4.8x
LIBOR
1%
DSCR
2.3x
1.2x
1.2x
1.7x
(b)
Debt Advisory
London
David Ascott
Partner
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E david.p.ascott@uk.gt.com
Tarun Mistry
Partner
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E tarun.mistry@uk.gt.com
Ven Balakrishnan
Partner
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E ven.balakrishnan@uk.gt.com
Jonathan Mitra
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Catherine Barnett
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E catherine.barnett@uk.gt.com
Shaun OCallaghan
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E shaun.m.ocallaghan@uk.gt.com
Michael Dance
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Mark OSullivan
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E mark.osullivan@uk.gt.com
Christian Roelofs
Director
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Kathryn Hiddelston
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E kathryn.v.hiddleston@uk.gt.com
Catherine Saunderson
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William Jeens
Associate Director
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E william.jeens@uk.gt.com
Jeremy Toone
Partner
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M +44 (0)7970 982 999
E jeremy.m.toone@uk.gt.com
Christopher McLean
Associate Director
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M +44 (0)7825 865 811
E christopher.mclean@uk.gt.com
Midlands
and North
South and
South-West
Matthew Bryden-Smith
Director
Manchester
T +44(0)161 953 6333
M +44 (0)7760 174 499
E matthew.g.bryden-smith@uk.gt.com
Nigel Morrison
Partner
Bristol
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M +44 (0)7976 854 440
E nigel.morrison@uk.gt.com
James Bulloss
Associate Director
Leeds/Newcastle
T +44 (0)113 200 1516
M +44 (0)7866 360 241
E james.bulloss@uk.gt.com
Jon Nash
Manager
Southampton
T +44 (0)23 8038 1184
M +44 (0)7969 651 108
E jonathan.a.nash@uk.gt.com
Claire Davis
Associate Director
Sheffield
T +44 (0)114 262 9728
M +44 (0)7789 076 601
E claire.e.davis@uk.gt.com
Alistair Wardell
Partner
Cardiff
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M +44 (0)781 506 2698
E alistair.g.wardell@uk.gt.com
Joe Dyke
Associate Director
Birmingham
T +44 (0)121 232 5210
M +44 (0)7557 012 636
E joe.dyke@uk.gt.com
Richard Goldsack
Director
Leeds
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M +44 (0)7736 329 722
E richard.goldsack@uk.gt.com
Raj Mittal
Director
Birmingham
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M +44 (0)7974 026 177
E raj.k.mittal@uk.gt.com
Philip Stephenson
Associate Director
Leeds/Newcastle
T +44 (0)191 203 7791
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E philip.stephenson@uk.gt.com
Ali Sharifi
Partner, Head of
Corporate Finance Advisory
Manchester
T +44 (0)161 953 6350
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E ali.sharifi@uk.gt.com
South-East
Richard Lewis
Director
Reading
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M +44 (0)7538 551 468
E richard.lewis@uk.gt.com
Phil Sharpe
Director
Cambridge
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M +44 (0)7798 662 609
E phil.j.sharpe@uk.gt.com
Simon Woodcock
Associate Director
Gatwick
T +44 (0)1293 554 092
M +44 (0)7912 888 669
E simon.woodcock@uk.gt.com
Scotland
Rob Caven
Partner
Glasgow
T +44 (0)141 223 0629
M +44 (0)7774 191 272
E rob.caven@uk.gt.com
John Montague
Director
Edinburgh
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M +44 (0)7711 137 263
E john.montague@uk.gt.com