Asset-Based Lending - Up in a Down World, Bank of America

The boom times are fading fast and, for commercial borrowers, finding financing that meets their needs is difficult. Carmen Bernardis, MD of Bank of America Business Capital Europe explains that businesses that once had little trouble obtaining credit are being forced to look for alternative routes.

‘Many borrowers are finding credit through counter-cyclical financing like asset-based finance,’ says Carmen Bernardis, managing director of Bank of America Business Capital Europe. Borrowing against a company’s assets such as receivables, inventory, machinery and real estate is on the rise, providing companies with greater flexibility in their debt structure. Intellectual property such as trademarks and trade names may also be used to secure an asset-based loan. In addition, secured financing is now more economical than in the past, largely as a result of automated collateral monitoring and healthy competition among lenders.

POSITIONED TO PROVIDE

Asset-based lending, typically as a revolving facility is, according to Bernardis, the solution for intensive working capital businesses that require significant liquidity.

‘Because it is not cashflow-dependent, an asset-based loan is not prey to the same range of bank covenants that can lead a company into an emergency restructuring, which might then involve the use of its assets in far less controlled and favourable circumstances.

‘Despite the high market liquidity of the past two years, Bank of America has maintained its commitment to asset-based lending. As a result, it finds itself in a strong position to provide the product as an alternative to normal senior debt. Recent deals have ranged from £25 million to in excess of $1.8 billion. Most loans are between £35 and £300 million. With the Bank of America name behind these deals, selling them down in an industry which is open for business is less challenging than many other markets.'

The pricing of asset-based lending is also competitive in a straitened market. Arrangement fees are typically between 100 and 125 basis points and margins range from 200 to 250 basis points. UK-based Luxfer Holdings, which designs and produces high performance engineering materials for the manufacturing industry has used a £45 million three-year revolving facility from Bank of America Business Capital, backed by its assets in the UK and US. ‘We were surprised no other European or US bank was prepared to offer such a deal covered by assets in both countries,’ says Stephen Williams, Luxfer’s CFO. ‘We used the proceeds to finance a debt for equity swap and make an acquisition. The cost of funds is broadly similar to a cashflow facility but the loan is more flexible.'

‘Setting up the facility was more complex and took longer than a cashflow facility, because of the much higher due diligence involved. Apart from that it was a simple facility to put in place and we are very happy.’

LEVERAGE AND BALANCE

At a time when good middle market companies are looking for opportunities to acquire less favoured competitors, asset-based financing is a powerful and economic way to leverage the balance sheet, while maintaining flexibility and leaving cashflow free to fluctuate according to market conditions, without tripping the awkward covenants that are part of other debt facilities.

‘As the banking industry re-evaluates its relationships with customers who are affected by the current dip in the economy,’ says Bernardis, ‘those financial institutions that offer asset-based loans are finding wide acceptance for their product.'

Time-tested and versatile, asset-based loans are delivering strategic financing at competitive terms, allowing companies in all types of industries to achieve operational flexibility through the value of their assets.