1. No category

BVCA Guides
GUIDE TO
Asset-Based Lending
In association with
DONE DEAL
300 current deals for 100 PE groups across UK and North America
DONE DEAL
DONE DEAL
DONE DEAL
A Portfolio Company
of Vision Capital
A portfolio Company
of Exponent Private Equity
A portfolio company of Endless LLP
& Phoenix Private Equity
£40,000,000
£Multi-Million
£40,000,000
Asset Based Lending
Asset Based Lending
Asset Based Lending
Chilled Savoury Food
Whisky Distillers
Auto Parts
DONE DEAL
DONE DEAL
DONE DEAL
A Portfolio company of
Maven Capital Partners
A Portfolio company of
Rutland LLP
A Portfolio company of
Synova Capital LLP
£8,400,000
£15,000,000
£9,000,000
Asset Based Lending
Asset Based Lending
Asset Based Lending
Promotional Merchandise
Vehicle Testing
Fashion Accessories
‘Done Deal’
defines
Do you have a deal that needs to get done?
Birmingham | Cambridge | Haywards Heath | Leeds | London | Manchester | Southampton
01444 475820
[email protected]
AssetBasedLendingUK.co.uk
PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). PNC Business Credit is the asset-based lending arm of PNC Bank, National Association, a wholly-owned
subsidiary of PNC and Member FDIC. Lending products and services require credit approval. GEN-3424 ©2010 The PNC Financial Services Group, Inc. All rights reserved. Member FDIC
Contents
Foreword5
Introduction6
How does ABL differ from leveraged loans? 7
What to expect – the ABL process
9
Structuring the deal
11
Final steps
16
Conclusion18
3
Flexible Cross
Border Solution
Driven Finance
BNP Paribas Commercial Finance partners with the Private Equity and Venture Capital
communities in the UK and across Europe in the mid-corporate market by delivering
working capital solutions in domestic and international markets.
At BNP Paribas Commercial Finance we take the time to understand a business, and
then deliver a flexible, solution-driven finance package that taps into our local funding
capabilities across Europe.
Call us on - 0845 693 1433 and find out what flexible finance solutions can help meet
your - and your clients’ - business objectives.
BNP Paribas Commercial Finance Ltd is a member of the Asset Based Finance Association (“ABFA”) and as such we are bound by the
ABFA Code for Members. For more information about the Code please visit www.abfa.org.uk/standards/overview.pdf
http://commercialfinance.bnpparibas.co.uk
Foreword
Asset-based lending (ABL), much like private equity, has over
the last decade experienced a significant transition from niche
sector to the mainstream, providing a genuine alternative to more
traditional forms of finance.
Indeed, in December 2014 the Asset Based Finance Association reported that asset-based
finance (which includes both ABL and invoice finance) represents a considerable 15.7% of
the UK’s GDP. Key to this growth was the recession – as the traditional investment banks
withdrew from the market, more and more businesses turned to asset-based lending as a way
of raising finance. According to PwC, there was a 33% increase in the level of assets financed
between 2006 and 2012.
Post-recession, appetite continues to be strong, not least of all amongst private equity
sponsors where it is an increasingly common feature in funding packages. This guide provides
an introduction to asset-based lending, outlining the concept and how it differs from leveraged
loans, and then walking through the ABL process, from issuing the Information Memorandum
to deal structuring and transaction completion.
The BVCA Guide to Asset-Based Lending is part of our series of guides designed to
provide an overview of new markets and strategies for the private equity and venture capital
community. Produced in association with BNP Paribas Commercial Finance, PNC Business
Credit and Wells Fargo, we hope you find it both useful and informative.
Tim Hames
Director General
BVCA
Foreword
5
Introduction
Borrowing against a company’s assets can be a simple and
inexpensive way of funding acquisitions, recapitalisations and
working capital requirements.
The borrowing process differs from leveraged loans, since the lender is particularly interested in
the nature and value of a company’s assets rather than simply its quality of earnings. Because
the value of some such assets changes regularly, asset-based lenders require a greater degree
(and frequency) of disclosure from the borrower than might be the case with a leveraged loan.
This has advantages for all parties since it engenders a close and open partnership between
borrower, lender and sponsor, where surprises are rare and challenges are revealed quickly and
dealt with early-on. Consequently in situations where a borrower needs additional support, the
lender can normally move very quickly given their high level of insight and engagement with the
borrower.
In this way asset-based lenders are very interested creditors, in a similar way that private equity
sponsors are very interested owners.
Asset-based lending (ABL) can work for a variety of businesses across a wide range of
sectors, and is an increasingly common component within structured finance packages and
cross-border transactions.
This is a guide to how the asset-based lending process works.
Peter Jones
Director Sales &
Marketing UK
BNP Paribas
Commercial Finance
6
Graham Barber
Steven Chait
Business Development &
Marketing Director
PNC Business Credit
Managing Director,
EMEA Regional Head
Wells Fargo Capital Finance
Asset-Based Lending
How does ABL differ from
leveraged loans?
For the borrowing company the main
difference between ABL and leveraged loans
is the flexibility of the borrowing facilities.
Rather than fixed term loans that are fully
drawn and amortize over time, much assetbased borrowing tends to be provided on a
revolving basis, more like an overdraft facility
than a term loan.
Since the size of that facility depends on the
(fluctuating) value of a company’s assets, the
lender needs to know what is going-on in realtime. This leads to the second difference to
leveraged lending: the relationship between
borrower and lender is a close one, with a high
degree of engagement and transparency.
Another big difference is that ABL does not
come with a myriad of financial covenants – it
is not uncommon for there to be just one.
Where ABL is structured solely around working
capital assets (i.e. those focused on receivables
and inventory) the facility would typically carry
a simple ‘interest-cover’ financial covenant,
measured as total interest costs-to-EBITDA.
For a more structured facility encompassing
revolving and term debt the financial covenant
“The relationship between borrower and lender is a close one”
How does ABL differ from leveraged loans?
7
would typically be in the form of a ‘fixed charge
coverage’ (to ensure the borrower can service
the debt repayment from its cash-flows.)
ABL structures do carry operational controls,
typically triggering a ‘conversation’ rather than
an event of default. That conversation and
consequent auditing may lead to a reduction
in the receivable or inventory advanced rates
or an increase in the facility reserves, but it
would typically not trigger a wind up of the
arrangement or transfer to the lender’s workout team.
This leads to another significant difference
between asset-based lenders and leveraged
lenders: specialist ABL providers have no
work-out teams. Once you have a relationship
manager on your ABL facility, that is the person
you will have throughout the life cycle of the
relationship.
For the company and private equity sponsor,
it may also be pertinent to note that ABL is
normally significantly less expensive than
leveraged loans. This is because banks are
required to calculate their regulatory capital
(under the various Basel Accords) based on
the probability of a company defaulting, as well
as by how much of the borrowing could be
recouped by the lender in the event of such
a default. The collateralised nature of assetbased lending means ABL’s should suffer a
lower level of capital loss following a borrower
default when compared to a leveraged loan,
consequently lowering the cost of borrowing for
its customers.
Figure 1. below serves to graphically highlight
some of the key structural differences between
a typical asset-based lending loan structure
and that of a leveraged loan.
Figure 1: Leveraged loans vs ABL
Leveraged
ABL
Basis of lend
EBITDA multiple
Asset value
Security
Yes/No
Always
Nature of facilities
Amortising and bullet
Revolving with amortisation on any fixed
asset components
Limit flexibility
Hard limit
Review limit – a function of asset values
Covenants
Multiple Financial
One financial with applicable collateral
performance covenants
Hold levels £m
25 - 30
30 – 60
Secondary market
Yes
Rarely traded after primary syndication
Ongoing financial information
Limited
Regular
Equity cheque
From 20%
From 10%
International
Yes
Yes but more difficult and usually restricted
to receivables
Number of Funders
Many
Fewer, owing to larger hold levels
Track record
Mature
Growing
Availability
Fixed at commencement
Variable – Dictated by asset-base but
capped by facility limit
Distributions
Limited
Permissible subject to tests
Margin
c. 450bps
c. 175bps – 300bps
Upfront
c. 400bps upfront
c. 75-150bps
Facility pre-payment fee
No
Yes
Collateral Monitoring Fee
No
Yes
Typical pricing
*This comparison is illustrative and could vary from lender to lender and individual credit policies and lending criteria.
8
Asset-Based Lending
What to expect –
the ABL process
An important difference is the ABL
‘transaction’ process. It is no more
complex or time-consuming than leveraged
lending, but it is different. The ABL provider
needs to know things (mainly about the
assets) that are not a standard component
of your typical Information Memorandum
documentation, and knowing what to look
out for should keep things on track
Information Memorandum
Like any other debt provider, an asset-based
lender will conduct an initial analysis based
on the provided Information Memorandum
(IM). ABLs care about the company’s position,
sector, and key customers and so on. But in
addition, an IM that contains some substantive
information on the company’s assets will be of
great use and ultimately enhance the efficacy of
the lending process. Figure 2 is an ABL wishlist that would enhance the typical IM.
Based on the IM and its own research, an ABL
provider will assess the deal and ponder several
questions. Are the assets financeable? Does the
lending meet our criteria? Can we deliver the
required package in the required time frame?
If the answer to all these questions is ‘yes’,
then the ABL provider, borrower/sponsor will
meet to ensure there is agreement on all the
parameters, and if not, how any shortfalls can
be plugged.
Figure 2: Information Memorandum tick-sheet
General
Location of assets
Sector characteristics
Management experience and credentials
Ownership structure – current and proposed
Strength of company’s market position
Financial
Balance sheet – size and depth of asset base
Net worth – equity / retained profits
Historical and Forecast Capital Expenditure spending
Other trends (e.g. revenue performance, margin performance, overhead performance)
Assets
Receivables – sector and location of debtors, standard terms of sale, ageing of ledger,
dilution to the ledger – credit notes, presence of rebates
Inventory – split of finished goods / work in progress / raw materials / location
Plant & Machinery – type, unencumbered or funded, location, age, depreciation profile
Real Estate – location, freehold/leasehold, age, size, factory vs office space
Intangibles – does a brand have value?
What to expect – the ABL process
9
Meeting the management
Dependent upon the type of transaction and
the level of access to the target company,
the ABL provider will commonly request a
meeting with the management team and ideally
visit the company’s main site of operations.
ABL providers will take a keen interest in
the company’s physical assets, operating
conditions and people during this process.
From here most ABLs will begin a gradual
process of information gathering and evaluation
aimed at making sure that the management
team are aware of the operating and information
requirements of an asset-based lend.
The final stage of this initial diligence will be
to gain access to more detailed business
information and up-to-date financial
information, commonly through a data-room.
The information will include elements such as:
management accounts, debtors and creditors
age listings, inventory ageing, forecasts and
applicable asset valuations.
Pre-investment proposal/approval
ABL providers are fiercely protective of their
reputation for delivering – and with good reason.
Without the comfort of proprietary deal flow (for
those ABLs that are not captive bank entities)
they are only as good as their last deal in a
competitive market. So the next stage is taken
very seriously: the pre-investment proposal,
which outlines the deal and is used to build
internal buy-in to ensure the ABL will, subject to
terms, be able to deliver. Following this, indicative
term sheets can be issued and a timeline for
completion of the deal can be agreed in principle.
How long this diligence takes depends on the
scale and complexity of the business and on how
dispersed its assets are, but expect between two
to three days for a simple, single site business
with accounts receivable-only facility, and up to
two to three weeks for complex, international
operations requiring multiple asset third-party
evaluations and appraisals.
Financial forecasting
While the field exams are taking place, the ABL
will be working assiduously to get comfortable
with the company’s financial forecasting
models. These will comprise an integrated P&L,
cash-flow statement and, importantly for ABL,
a balance sheet model that includes meaningful
detail on working capital and a pro-forma
opening balance sheet tracking out monthly,
for example, two years, and then annually for a
further three to five years.
“ABL providers
are fiercely
protective
of their
reputation for
delivering –
and with good
reason”
The granular trading information on sales,
customers, contracts and terms analysed during
the field exam are now used by the ABL to
validate the sales and margin forecasts as well as
calculating the working capital borrowing base.
Forecasts should be compiled on the
same basis as audited accounts or at
least somehow reconciled to them, so that
historic audited accounts, current and
forecast management information tally, to
ensure a like-for-like comparison.
Due diligence
Now the real work begins for the ABL provider
and its advisers. It starts with on-site due
diligence (sometimes called the ‘field exam’ or
‘survey’) of accounts receivables, followed by
evaluations of other relevant ‘financeable’ assets,
such as inventory, and property, machinery
and equipment, as well as any relevant further
financial and commercial diligence.
Parts of this will be done internally by ABLs, but
where a third-party is likely to be used, and if
a private equity sponsor is speaking to several
potential lenders, it is common for the competing
ABL parties to agree to a specific third-party to
conduct certain parts of the examination on all
their behalves, subject to the sponsor/borrower
underwriting the cost.
10
Asset-Based Lending
Structuring the deal
Calculating the borrowing base
How much a company can borrow is
determined by its collateral base – i.e. its
fundable assets – with debt secured through the
ABL’s priority fixed and floating charge on those
assets. The size of the facility is not necessarily
affected by under-performance of trading or
cash-flow.
To calculate the borrowing base for a transaction
the ABL will evaluate the relevant assets (during
due diligence), and deduct any ineligibles
and specific costs associated with reclaiming
collateral to ascertain ‘eligible assets’, to which
they will apply an advance rate.
Eligible accounts receivable will typically attract
advance rates of up to 90% since it constitutes
debt that is independently supported and a
statutory contractual liability. Certain factors are
used to ascertain the advance rate, including
where the debtors are located (country), sales
contract terms, payment terms, dilution, how
quickly the receivables are paid and how easily
the customer can prove that the goods or
services have been provided.
Structuring the deal
Jargon buster
ADVANCE RATE: The ratio between the amount an ABL is
willing to lend against a particular eligible asset, and the total
value of that asset as determined during due diligence.
DILUTION: The aggregate value of the shortfall between the
amount invoiced by a borrowing company and the amount
actually paid by that company’s debtors. Typical dilutions
are credit notes, settlement discounts and any debit note
adjustments. As an industry rule of thumb, advance rates are
based on twice the level of dilution, plus 5. So, for example, if a
company has 4% dilution, the advance rate would be 87%.
HEADROOM: The excess availability from the borrowing base
over and above the actual forecast usage. ‘Headroom’ is to ABL
what a revolving credit facility is to a leveraged loan.
11
Figure 3a: Accounts Receivable Borrowing Base
Availability Calculation / Borrowing Base
ACCOUNTS RECEIVABLE CALCULATION
Due Diligence
Ledger
Ledger1
Ledger2
Total GBP
GBP
USD
EUR
31/11/2014
31/11/2014
31/11/2014
31/11/2014
1
1.5785
1.2585
£18,183,301
£15,247,841
$1,543,275
€ 2,463,860
£977,685
£1,957,775
$83,281
€0
Units / CY
Date of AR Ledger:
Exchange Rates:
Gross AR Balance
GBP Equivalent
Ledger3
Less:
A
Non-Notified/Excluded Accounts
£67,868
£15,108
£52,760
GBP Equivalent
Notified Ledger Balance:
£18,115,434
Less Ineligibles:
Past Due (per Ageing) & Cross Age > 50%
7.13% 90 days EOM
Credit Balances in Past Due
C
D
E
Contra Offset to Payables
Credit Note Issuance Lag and Disputes
Accrued Retros
Debtor Spread Restriction - % of Notified Ledger
Exotic Debtors (Non-OECD or EEA Territories) & Excess over Credit Insurance Limits
GBP Equivalent
€0
£176,243
£176,243
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£49,491
£0
$0
€ 62,285
£0
£0
$0
I
€0
£63,475
£63,475
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£0
£0
$0
€0
£1,590,375
£1,417,059
$71,875
€ 160,839
J
£45,534
£127,802
£16,525,038
£13,815,674
$1,388,119
€ 2,303,021
K
£879,391
£1,829,973
85%
85%
85%
85%
1,179,901
€1,957,568
Availability
£14,046,282
£11,743,323 $
GBP Equivalent
Effective Advance Rate on Notified Ledger
78%
Facility Limit
31/11/2014
Headroom/Excess Availability
£1,555,477
83%
79%
77%
L
M
£14,046,282
£9,875,000
£4,171,282
A
Non notified/excluded accounts include all Inter-Company sales, cash or pro-forma sales and sales that are deemed non fundable.
B
Eligible AR collateral by currency and/ or company when consolidated into a single Borrowing Base.
C
Value of any AR that remains unpaid past the eligible funding period. If 50% or more of a receivable is outstanding beyond the eligible
funding period the whole balance is reserved.
D
Reserve for any potential offset between buyer & seller where they have a reciprocal trading relationship.
E
Reserve for all AR that can be returned by a debtor or is in dispute.
F
Value of rebates/over riders due to debtors. These amounts are ‘dilutive’ to the ABL’s eligible collateral.
G
Prime debtor limit set based on assessment of borrower & debtor credit quality combined with sale terms, payment history and location
of debtor.
H
Value of any Payables outstanding beyond payment terms to carriers who ship/deliver the borrower’s goods to debtors.
I
Reserve for all ‘high risk/sanctioned ‘ debtor territories, under or non insured debtors.
J
Total value of all Eligible AR Collateral in ‘base currency’ on which the Advance Rate is applied.
K
The %age at which the ABL advances funding against the AR based on the overall collateral evaluation.
L
The forecast usage of the AR Borrowing Base based on the pro forma capital structure of the transaction (figure 5).
M
12
£747,483
£18,500,000
Availablity
Drawdown as per Capital Structure
€ 98,554
$1,231
F
G
H
Total Ineligibles
Advance Rate
€ 2,463,860
$70,644
Other Creditors and Accruals
GBP Equivalent
£0
B
£3,343
3%
Net Eligible
$1,459,994
£1,173,998
Non-Invoice Debits/GL & MI, Current Funder variance
Excess Dilution (Sales) if fixed AR Advance Rate
B
£4,123
Export Restriction
Carrier Preferential Creditors
£15,232,733
£1,297,043
Sale or Return Terms & Invoiced Pre-Delivery
Direct Receipts
B
The difference between the actual Availability generated from the Borrowing Base and the draw down required by the borrower.
Asset-Based Lending
Inventory carries a much higher risk profile,
particularly since it changes regularly, so typically
attracts up to 75% of appraised value (which
would be based on the lender’s ‘net orderly
liquidation value’, and which would also include
details of how the assets would be sold). See
Figure 3b for an examples of an inventory
borrowing base.
Fixed asset term loans are not considered
suitable for borrowing bases and as such are
structured as straightforward amortising term
loans. They are always subject to a third party
appraisal which is payable by the borrower. The
debt quantum and the loan amortisation are
linked to both the borrower’s ability to service
and repay debt from free cash flow and the
valuation of the applicable asset.
Plant and equipment is typically offered around
75p in the pound against an ex-situ/appraised
forced-sale valuation whilst property would
attract a similar rate, but would also be subject
to lender valuations based on a 365 day open
market value to take into account a potentially
longer sale process.
“How much a company can borrow is determined by its collateral base”
Figure 3b: Inventory borrowing base
A
Combined gross value of all Raw Materials,
Work In Progress and Finished Goods held
by the borrower.
B
Exclusions for slow moving, obsolete,
returned Inventory, Raw Materials or goods
subject to ROT, Packaging , WIP, stored at a
third party location, damaged...
C
Inventory value derived from historic sales
& margin, mix and cost analysis by the
appraiser.
D
Appraisers calculation of all costs associated
with liquidating and disposing of all inventory
in a given period of time via a preferred
method. Usually 120 days.
E
The Advance Rate the ABL determines is
appropriate for the types of inventory being
funded taking into account the appraisers
comments, recommendations and the
overall transaction and lending structure
F
Mandatory statutory reserves the ABL would
have to pay to Creditors in order to realise its
lending in an insolvent liquidation scenario.
Structuring the deal
Inventory Borrowing Base (NOLV based Appraisal)
31/10/2014
Per Appraisal
Per Underwrite
£5,953,223
£5,953,223
A
£M GBP
Gross Inventory at Cost
Less:
Excluded B
Appraised Inventory at Cost Price
£2,000,248
£3,952,975
£2,000,248
£3,952,975
£5,533,203
£5,533,203
Less:
Liquidation Expenses D
Net Orderly Liquidation Value
£974,958
£4,558,245
£974,958
£4,558,245
Advance Rate
Gross Availability
85%
£3,874,508
85% E
£3,874,508
Less:
Specfic Reserves
Enterprise Act
Preferential Creditors
Net Availability
Effective Advance Rate on cost
£0
£600,000
£40,000
£3,234,508
54%
£30,000
£600,000
£40,000
£3,204,508
54%
Gross Orderly Liquidatiion Value
C
F
13
ongoing working capital headroom generated
by the facility.
The ABL will use the outputs of the collateral
due diligence and appraisals and overlay
them onto the borrower’s monthly projected
forecasts. This ‘forecast availability schedule,’
which will take into account seasonality
and expected growth rates, will help lender,
sponsor and borrower assess the levels of
The example in Figure 4 shows forecast
availability driven from an ABL’s own due
diligence analysis versus the company’s
expected borrowing. The difference between
the two is the headroom.
Figure 4: Headroom and Total Availability
£20,000,000
£4,000,000
Total Availability
Headroom
£17,500,000
£3,000,000
£15,000,000
£2,500,000
£12,500,000
£2,000,000
£10,000,000
£1,500,000
£7,500,000
£1,000,000
£5,000,000
£500,000
£2,500,000
TOTAL AVAILBILITY
HEADROOM
£3,500,000
£0
Cash-flow loans
Some ABL providers may extend a cash-flowbased term loan (sometimes referred to as a
‘strip’ or an ‘air ball’) to borrowers with strong
capital structures and sufficient free cash flow
to service the debt (as measured by the fixed
charge coverage ratio).
Dec 15
Nov 15
Oct 15
Sep 15
Aug 15
Jul 15
Jun 15
May 15
Apr 15
Mar 15
Feb 15
Jan 15
Dec 14
Nov 14
Oct 14
£0
This type of loan is secured but not collateralised
against specific assets – as such it tends to
be extended over and above the asset-based
borrowings. Such a facility provides the borrower
with more liquidity for its working capital revolver,
meaning it enhances headroom or potentially
allows the sponsor to inject less of their own
money, thereby enhancing their own returns.
Figure 5: Illustrative all asset ABL capital structure
Fig.5 ABL Capital Structure
Accounts Receivable (i)
Inventory (i)
Machinery & Equipment (ii)
Freehold Property (iii)
Cash Flow/Air Ball/Top Slice (iv)
i. Revolving facility
ii. 5 Yr fully amortising term loan @£31,250 p/m
iii. 10 Yr amortisation profile 5 yr term @ £12500 p/m
iv. 3 Yr amortisation profile @ £55,583 p/m
14
Gross
£18,183,301
£5,533,203
£2,500,000
£2,000,000
£2,000,000
£30,216,504
Ineligible
£1,590,375
£974,958
Term
5 Year
5 Year
5 Year
3 Year
Profile
Revolving
Term
Term
term
Net Eligible
£16,525,038
£4,558,245
£2,500,000
£2,000,000
Advance Rate
85%
85%
75%
75%
Statutory Inventory Reserves
£670,000
£25,583,283
Monthly Amortisation
£0
£31,250
£12,500
£55,583
£99,333
Annual Amortisation
£0
£375,000
£150,000
£667,000
£1,192,000
Availability
Drawdown
Headroom
£14,046,282
£9,875,000
£4,171,282
£3,204,508
£1,602,254
£1,602,254
£1,875,000
£1,875,000
£0
£1,500,000
£1,500,000
£0
£2,000,000
£2,000,000
£0
£22,625,790
£16,852,254
£5,773,536
* Inventory is a £4,000,000 sub limit of the AR facility
Facility Cap
£18,500,000
* see below
£2,625,000
£1,800,000
£3,600,000
£26,525,000
Bullet on Maturity
£0
£0
£750,000
£0
£750,000
Asset-Based Lending
Figure 6: Transaction Sources and Uses
Fig 6. Transaction Sources & Uses
SOURCES
ABL Revolver Availability
ABL Term Debt Availability
Deferred Consideration
Management Equity
Sponsor Equity
Sponsor Loan Notes
TOTAL
ABL Closing fee 100 bps
£17,250,790
£5,375,000
£0
£300,000
£300,000
£5,000,000
£28,225,790
USES
Purchase Price
Working Capital
All Fees
Headroom
£20,104,111
£1,448,143
£900,000
£5,773,536
£28,225,790
£26,525,000 x 100 bps = £265,250
Capital structure
Once the borrowing base has been calculated
the ABL will assess whether the size and
structure of the revolving facility, when
combined with any term loan component,
meets what the sponsor/borrower is looking
for in meeting immediate transaction financing
needs, as well as delivering sufficient
working capital.
1. The total of Accounts
Receivable and Inventory
Availability in the ABL Capital
Structure (Figure 5, page 14)
2. The total of Machinery
& Equipment, Freehold
Property and Cash Flow/
Air Ball/Top Slice Availability
in the ABL Capital Structure
(Figure 5, page 14)
“As each borrower and asset
base is different, reporting
requirements will vary”
The example in Figure 6 above builds on the
ABL capital structure in Figure 5 and illustrates
how the ABL facilities fit in to a fully funded
capital structure.
Monitoring and reporting
In addition, because ABL facilities tend to be
revolving, the borrowing base is a dynamic
structure that will fluctuate with the value of the
assets. This is where the company’s finance
team need to work hand-in-glove with the
ABL to ensure an open information flow over
agreed periods.
As each borrower and asset base is different,
reporting requirements will vary. Information
reporting could be required on a monthly
rather than weekly basis, covenants might be
tested less frequently, and there may be fewer
disclosure requirements.
The final part of this process is the ABL sanity
check. Now there is visibility of the business, is
the package what the sponsor requested, does
it provide sufficient headroom for the target’s
working capital requirements and transaction
structure, and can we deliver?
If the answer is still ‘yes’, then the credit paper
will be submitted, approval will be obtained,
a formal offer letter will be issued, and the
process enters its final stages.
Structuring the deal
15
Final steps
Legal
While the bulk of the preparation is now
complete, how long it takes from here to
completion is largely down to the sponsor/
borrower, and as with all transactions it can
range from several days to many months.
One sure way to ensure a smooth process
is to use legal counsel that has a specialist
banking team familiar with and experienced in
asset-based structures. It is worth noting that
ABL documents are not standardised, although
they are becoming more sensitive to private
equity-specific needs around elements such as
committed facilities.
“Use legal counsel that has a specialist banking team familiar with and
experienced in asset-based structures”
Know your ABL team
As a borrower you will be required to have completed and passed all the lenders
‘Know Your Customer’ compliance requirements, but how well do you know your
lender? These are not people you will deal with only at ‘liquidity’ or ‘credit’ events, but
on an on-going basis. The typical ABL team looks like this:
THE ORIGINATOR
The business development manager will source deals, assess their applicability to
the lending organisation and negotiate all the terms, is responsible for managing the
transaction process, and ultimately ensures the deal can be delivered and is funded.
THE ANALYST
The field audit/due diligence/collateral analyst who will go on-site, inspect facilities
and validate collateral before, during and after completion.
THE UNDERWRITER
Works in close co-operation with the originator in analysing opportunities,
investigating the background of target companies, their people and financials, and
responsible for presenting the credit proposal in a coherent manner that ensures any
risks are mitigated and the basis of the lend is robust.
THE PORTFOLIO MANAGER
The relationship manager who is the day-to-day point of contact for the customer,
responsible for monitoring the business’s situation, protecting the relationship,
supporting the borrower in their evolving needs, through good times and, if necessary,
more challenging times.
16
Asset-Based Lending
The ABL loan document contains much that
is familiar from leveraged loan documents
but are not yet standardised in the way LMA
documents have become. For instance, there
are provisions solely related to the asset base
and information provision and monitoring that
are not found in leveraged loan documents.
Prior to the drawing up of legal documents,
the private equity sponsor may have several
points of negotiation to the Offer Letter
before deciding upon a final ABL provider.
The Financial Director of the target company
may also have opinions about the facility that
could change things. But assuming there are
no real obstacles (and there very rarely are at
this stage), and condition precedents can be
satisfied, we move to the final step.
The ‘Take-on’
This refers to updating collateral reports and
agreeing the final availability figures. The
Relationship Manager of the ABL provider will
then guide the management through the ABL
systems and processes, and provide manuals
and tutorials.
After this point, the transaction process is
finally complete.
Structuring the deal
Syndication
There is an active ABL syndication
market, with cooperation driven by the
ABL providers themselves rather than
capital markets intermediaries. ABL
providers tend to have a good working
relationship, and regularly collaborate to
deliver larger lending facilities.
In addition, there is an active crossborder syndicated ABL market in
operation with US ABLs investing into
the UK and Continental Europe, as well
as several home grown providers. Some
of the largest European ABL deals have
been the ‘foreign’ components of US
originated deals, with recent examples
of European collateral sub-limits
pushing the US$1 billion mark; although
it should be noted that these have been
for large international corporates with
strong credit ratings.
When considering cross-border
transactions, it is important to know
your lenders, and be comfortable with
their international capabilities. Not all
European jurisdictions are ABL friendly
and in many cases facilities are limited
to receivables financing due to European
banking regulation and the lenders’
subsequent ability to take security.
17
Conclusion
Asset-based lending can be a powerful
weapon in a private equity sponsor’s
armoury. Provided the target company has
some solid assets (heavily contractual service
businesses tend to be less suitable for
instance) it can be a simple, inexpensive and
flexible form of funding, both for acquisitions
and financing existing portfolio companies
either for growth or to fund dividend recaps
on the back of some solid assets.
Using the typical ABL structures in Figures 6 and
7, the following illustration shows what the proforma capitalisation of a private equity acquisition
funded by asset-based lending could look like.
The relationship with the lender tends to be quite
different to that of a leveraged loan provider, and
this can be both unsettling for those unfamiliar
with the process, and a great comfort to those
sponsors and borrowers that value a true
partnership approach, one which will support
the company through its growth phases and
potential future ownership changes.
The story of ABL in recent decades has
been one of evolution: with an initial focus on
working capital assets, ABL has developed
into a broader corporate funding product
based on the depth of a borrower’s balance
sheet, whilst it has simultaneously evolved
beyond mainly manufacturing and industrial
assets to encompassing a far wider range of
underlying assets.
Today ABL is used in complex, international
transactions across a wide range of sectors,
from retail through to distribution, logistics,
various forms of manufacturing, equipment
rental and recruitment. It can constitute the
sole debt piece or can be used as part of
a structured finance package that includes
mezzanine and other debt components. Its
appearance in Unitranche loan structures is
also no longer a rarity. In the US it is a staple
part of the corporate finance structure on most
sponsored transactions.
In the UK asset-based lending has historically
played second fiddle to leveraged loans for
financing private equity transactions. Experience
from other markets suggests UK-based
sponsors could take more advantage of this
simple and flexible form of finance.
O&OE
All tables are for illustrative
purposes only.
“ABL has developed into a broader corporate funding product based on
the depth of a borrower’s balance sheet”
Figure 7: Pro-Forma Capitalisation
Fig 7. Proforma Capitalisation
ABL AR & Inventory
ABL M&E
ABL Property
ABL Cash Flow
TOTAL ABL DEBT
Debt to Adj EBITDA
Opening Amount
£17,250,790
£1,875,000
£1,500,000
£2,000,000
£22,625,790
% of Total
61%
7%
5%
7%
80%
£5,000,000
18%
£5,000,000
18%
0.9 X
£600,000
2%
0.1 X
£28,225,790
100%
5.3 X
Pricing Base + bps
225
325
325
400
Interest
Paid
Paid
Paid
Paid
Snr Debt Fixed Charges
£0
£375,000
£150,000
£667,000
1000*
Paid/PIK
* Interest Paid
Snr debt
£500,000
Loan Notes £300,000
Total
£800,000
* Interest PIK
0
£200,000
£200,000
4.2 X
£1,192,000
Sponsor subordinated loan notes
Deferred consideration Loan note
Total Other Debt
Equity
Total Consideration
EBITDA TTM Sep 14
Adjusted EBITDA Capex -­‐ New, replacement, maintenance
Annual Senior Debt Fixed Charges
Total Paid Interest
£5,740,000
£5,360,750
£2,125,000
£1,192,000
£800,000
£5360.75-­‐
FCCR = EBITDA -­‐ Non Financed CAPEX/Scheduled Debt £2125/£1192+800 = 1.62 : 1
Repayment+ Paid Borrowing Costs + Loan Note Redemptions
Interest Cover = EBITDA -­‐ Non Financed Capex/ Paid £5360.75-­‐£2125/800 Borrowing Costs
= 4.0 : 1
18
Asset-Based Lending
Work with a proven and experienced lender
Private equity firms looking to maximise their borrowing capacity can turn to Wells Fargo Capital Finance for
flexible, innovative financing. We provide comprehensive asset-based lending and technology finance to a wide
spectrum of companies across the U.K.
Comprehensive asset-based financing
As a leader in asset-based financing, we offer tailored funding structures for mid to large corporates facing a variety
of situations, including growth, leveraged buyouts, refinancing, restructuring, early and mid-stage turnarounds,
and mergers and acquisitions.
Technology finance
Public and private enterprise software and technology companies can access senior secured credit facilities
structured on recurring revenues, cash flow, or a combination of both. Companies typically use the facilities to
finance acquisitions and recapitalisations, as well as for working capital and organic growth initiatives.
Success stories
Loch Lomond
Spirits distiller
We served as Joint Lead Arranger on an asset-based credit facility that supported
the acquisition of Loch Lomond by Exponent Private Equity.
Kurt Geiger
Luxury footwear
retailer
We provided a global asset-based financing solution to support the acquisition of
The Jones Group by Sycamore Partners and the subsequent management buyout
of Kurt Geiger.
Intelliflo
Leading provider of
front and back office
software to financial
advisors
We served as Agent and Arranger on a senior facility to support HgCapital’s
investment in this market-leading software company.
For more information, contact Wells Fargo Capital Finance today
Steven Chait, Managing Director, EMEA Regional Head
+44 (0)845 641 8888
wellsfargocapitalfinance.co.uk
We are available to take your calls Mondays through Fridays, 9:00 a.m. to 5:00 p.m. GMT, excluding UK bank holidays. Call costs may vary — please check with your telecommunications provider.
Calls may be recorded for security purposes and so that we can monitor the quality of our service.
Wells Fargo Capital Finance is the trade name for certain asset-based lending and senior secured lending services of Wells Fargo Capital Finance (UK) Limited and Wells Fargo Bank, National
Association (WFBNA). Wells Fargo Capital Finance (UK) Limited is a wholly-owned indirect subsidiary of WFBNA, and a private limited company incorporated under the laws of England and Wales
with its head office and registered office at 5th Floor, Bow Bells House, 1 Bread Street, London, EC4M 9BE. Wells Fargo Capital Finance (UK) Limited is registered with the UK’s Companies House
under company number 02656007. WFBNA is a national banking association organised under the laws of the United States with its head office at 420 Montgomery Street, San Francisco, CA 94104,
USA. WFBNA is registered with the U.S. Office of the Comptroller of the Currency. WFBNA is registered with the UK’s Companies House under number FC026633. WFBNA is subject to regulation
by the Financial Conduct Authority in the UK and limited regulation by the Prudential Regulation Authority. Details about WFBNA’s regulation by the Prudential Regulation Authority are available
from WFBNA on request.
© 2015 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. WSC-1237818
About the Sponsors
BNP Paribas
Commercial Finance
PNC Business Credit
Wells Fargo Capital Finance
BNP Paribas is a leader in ABL
across Europe and beyond.
At PNC Business Credit, ‘Done Deal’
is more than a tag line. It defines our
business.
Wells Fargo Capital Finance provides
comprehensive asset-based lending
and technology finance to a wide
spectrum of companies across
the UK. With offices in London,
Birmingham, and Manchester, we
bring a strong and proven track
record of working with clients
to develop their businesses. We
deliver flexible financing options
for companies facing a variety of
situations, including: early and
mid-stage turnarounds, growth,
leveraged buyouts, refinancing,
restructurings, and mergers and
acquisitions.
With operations from Portugal in the
west to Turkey and in the east we
offer an unrivalled capability to fund
asset based deals in 15 European
jurisdictions.
We combine the balance sheet
strength of one of Europe’s leading
banks with the local expertise of ABL
practitioners on the ground to deliver
appropriate ABL funding solutions
to a range of corporate clients. Our
products range from simple single
country debtor funding through
non-recourse solutions to multijurisdictional asset based lines.
Our people have considerable
experience in working alongside
Private Equity in a variety of
transactions both in the UK
and across multiple European
jurisdictions and beyond.
As the ABL arm of one of the best
capitalized banks in the world, we
stand ready to assist the Private
Equity community in creating value
both within existing portfolios and
across new acqusitions.
PNC Business Credit is one of the
leading U.K. Asset-Based lenders
to the Private Equity community,
advisors and companies alike.
We provide funding solutions for
mid-market companies that deliver
detailed understanding and flexibility,
combined with unparalleled client
access to our senior team
Optimum levels of finance for event
driven change
• Mergers & Acquisitions
• Management Buy Out/Buy In
•Recapitalisation
•Refinance
•Growth
•Restructure/Turnaround
PNC finds value in;
• Accounts Receivable
•Inventory
•Machinery
• Freehold Property
• Intellectual Property – Brands
PNC Business Credit is part of the
United States based PNC Financial
Services Group Inc, a retail banking
and financial services group. With
assets in excess of $300bn, deposits
of over $200bn, a Tier 1 core capital
ratio of 10% and in excess of 38,000
customers and 57,000 employees,
which makes PNC one of the largest
banking institutions in the US.
Contact
T: +44 (0) 1444 475820
E:DoneDeal@
pncbusinesscredit.co.uk
W:AssetBasedLendingUK.co.uk
British Private Equity & Venture Capital Association
5th Floor East, Chancery House, 53-64 Chancery Lane, London WC2A 1QS
T +44 (0)20 7492 0400 [email protected] www.bvca.co.uk
We work with public and private
UK-based companies, in addition
to US and Canadian businesses,
and multinational businesses with
operations in the UK, Western
Europe, the US, Canada, and
beyond. As part of Wells Fargo &
Company, a leading financial services
provider with a long-standing
reputation for strength and stability,
we can offer access to a wide range
of products and services aimed at
helping companies succeed.
For more information, visit
www.wellsfargocapitalfinance.co.uk