The Age of ABL - Ted Ettershank, Lloyds TSB Commercial Finance

Growth in the global market for asset-based lending in Europe continues to follow behind the US market, but the impact of changing conditions in financial markets could accelerate its development. According to Ted Ettershank, Chairman of ABFA and MD of Lloyds TSB Commercial Finance, the flexibility and risk profile of ABL are drawing more attention as businesses seek alternative sources of funding.

Regardless of worsening conditions in the credit market, 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 ever more users, as markets in the UK and Europe mirror development already seen in the US.

ABL is growing fast in Germany, Ireland and the UK, where the deals are becoming larger. The industry has moved on from invoice financing for SMEs to become a realistic alternative for midsized 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, chairman of the Asset Based Finance Association (ABFA).

‘ABL is effective for businesses growing organically or through acquisition, and in the transaction market for MBO/MBI and refinancing. This is why new entrants offering ABL solutions are entering the UK and European markets from the US and other developed markets,’ he adds.

FIT FOR CYCLICAL MARKETS

ABL offers important 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 can assist by providing structured debt facilities when access to alternative funding sources may be 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 in 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.