Lloyds TSB: ABL to Withstand the Crunch - Ted Ettershank
Over the last 20 years, the market for asset-backed lending has grown consistently as more organisations recognise its resilience in the face of fluctuating market conditions. Ted Ettershank of Lloyds TSB Commercial Finance tells FDE how growth is now accelerating as liquidity becomes harder to find.
Regardless of worsening credit market conditions, corporates need funding and are willing to consider new ways to unearth liquidity. Growing volume in the market for asset-based lending (ABL) suggests it is attracting more users, as markets in the UK and Europe mirror development already seen in the US.
The ABL industry has moved on from invoice financing for SMEs to become a realistic alternative for mid-sized and large corporates.
The UK industry now supports 50,000 businesses and lends around £17 billion. This growth stems largely from the fact that ABL can fund all sizes of business, from start-up to global enterprises, offering them more flexibility in their debt structure.
‘CFOs have a real alternative to traditional lending. ABL funding availability is linked to business dynamics and it works well in parallel with other funding sources. Increasingly, corporates are looking for the most flexible and dynamic solutions,’ says Ted Ettershank, immediate past chairman of the Asset Based Finance Association (ABFA).
Fit for cyclical markets
ABL offers opportunities to companies facing harder times in global financial markets, which impact the lending capacity of ABL providers' less-than conventional lending, as loans are linked to tangible underlying assets. ABL uses capital more efficiently than debenture or term lending, and loss ratios are normally lower for working capital purposes.
‘ABL facilities fluctuate with the value of the underlying asset. In times of growth this helps clients avoid overtrading, and in times of slowdown it focuses their attention on managing working capital at a much earlier stage than if the funding is not dynamic and asset-linked,’ says Ettershank.
Fewer covenants usually apply to ABL facilities than to alternative working capital structures, and if they do exist they place more emphasis on operational measures linked to the asset, so are less vulnerable to short-term changes in financial performance.
‘In the current climate businesses should relate their borrowing to the value of their assets and the cash flow dynamics,’ says Ettershank. ‘In the good times, many companies obtained short-term funding for the purchase of long-term assets. The downside is that changes in rates and terms could be applied which may not benefit the company. For ABL facilities that include HP/leasing elements, fixed rates from the outset and matching the facility with the useful life of the asset reduces the vulnerability of businesses.’
‘Debtor protection allied to ABL products can help clients de-risk themselves against debtor default. An opportunity may arise, in downtimes on the economic cycle or periods of reduced credit availability, for companies to acquire other businesses. ABL assists by providing structured debt facilities when access to alternative funding sources is restricted,’ he adds.
Driven by the search for liquidity, corporates are turning in greater numbers to ABL, though Ettershank recognises that there is more to do to bring them to a more sophisticated level – hence ABFA’s work with representatives of intermediary industries, accountants’ corporate finance departments, lawyers and VC houses to build awareness and understanding.
Ettershank expects ABL volume to continue growing in the UK and elsewhere in Europe, especially among mid-sized and large corporates, though there are challenges ahead. For instance, ABFA is lobbying for a uniform commercial code across Europe, to harmonise the legal landscape for ABL.
However long it takes legislation to catch up with market demand, ABL looks as if it is here to stay.
