Beruflich Dokumente
Kultur Dokumente
GUIDE TO
Asset-Based Lending
In association with
DONE DEAL
300 current deals for 100 PE groups across UK and North America
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
Foreword 5
Introduction 6
Final steps 16
Conclusion 18
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 & Graham Barber Steven Chait
Marketing UK Business Development & Managing Director,
BNP Paribas Marketing Director EMEA Regional Head
Commercial Finance PNC Business Credit Wells Fargo Capital Finance
Asset-Based Lending
6
How does ABL differ from
leveraged loans?
For the borrowing company the main leveraged lending: the relationship between
difference between ABL and leveraged loans borrower and lender is a close one, with a high
is the flexibility of the borrowing facilities. degree of engagement and transparency.
Another big difference is that ABL does not
Rather than fixed term loans that are fully come with a myriad of financial covenants – it
drawn and amortize over time, much asset- is not uncommon for there to be just one.
based borrowing tends to be provided on a Where ABL is structured solely around working
revolving basis, more like an overdraft facility capital assets (i.e. those focused on receivables
than a term loan. and inventory) the facility would typically carry
Since the size of that facility depends on the a simple ‘interest-cover’ financial covenant,
(fluctuating) value of a company’s assets, the measured as total interest costs-to-EBITDA.
lender needs to know what is going-on in real- For a more structured facility encompassing
time. This leads to the second difference to revolving and term debt the financial covenant
Leveraged ABL
Nature of facilities Amortising and bullet Revolving with amortisation on any fixed
asset components
Hold levels £m 25 - 30 30 – 60
Typical pricing
Asset-Based Lending
8
What to expect –
the ABL process
An important difference is the ABL addition, an IM that contains some substantive
‘transaction’ process. It is no more information on the company’s assets will be of
complex or time-consuming than leveraged great use and ultimately enhance the efficacy of
lending, but it is different. The ABL provider the lending process. Figure 2 is an ABL wish-
needs to know things (mainly about the list that would enhance the typical IM.
assets) that are not a standard component
Based on the IM and its own research, an ABL
of your typical Information Memorandum
provider will assess the deal and ponder several
documentation, and knowing what to look
questions. Are the assets financeable? Does the
out for should keep things on track
lending meet our criteria? Can we deliver the
required package in the required time frame?
Information Memorandum
Like any other debt provider, an asset-based If the answer to all these questions is ‘yes’,
lender will conduct an initial analysis based then the ABL provider, borrower/sponsor will
on the provided Information Memorandum meet to ensure there is agreement on all the
(IM). ABLs care about the company’s position, parameters, and if not, how any shortfalls can
sector, and key customers and so on. But in be plugged.
General
Location of assets
Sector characteristics
Management experience and credentials
Ownership structure – current and proposed
Strength of company’s market position
Financial
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?
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.
Asset-Based Lending
10
Structuring the deal
Calculating the borrowing base
How much a company can borrow is Jargon buster
determined by its collateral base – i.e. its ADVANCE RATE: The ratio between the amount an ABL is
fundable assets – with debt secured through the willing to lend against a particular eligible asset, and the total
ABL’s priority fixed and floating charge on those value of that asset as determined during due diligence.
assets. The size of the facility is not necessarily
affected by under-performance of trading or DILUTION: The aggregate value of the shortfall between the
cash-flow. amount invoiced by a borrowing company and the amount
actually paid by that company’s debtors. Typical dilutions
To calculate the borrowing base for a transaction are credit notes, settlement discounts and any debit note
the ABL will evaluate the relevant assets (during adjustments. As an industry rule of thumb, advance rates are
due diligence), and deduct any ineligibles based on twice the level of dilution, plus 5. So, for example, if a
and specific costs associated with reclaiming company has 4% dilution, the advance rate would be 87%.
collateral to ascertain ‘eligible assets’, to which
they will apply an advance rate. HEADROOM: The excess availability from the borrowing base
over and above the actual forecast usage. ‘Headroom’ is to ABL
Eligible accounts receivable will typically attract what a revolving credit facility is to a leveraged loan.
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.
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.
Value of any AR that remains unpaid past the eligible funding period. If 50% or more of a receivable is outstanding beyond the eligible
C
funding period the whole balance is reserved.
D Reserve for any potential offset between buyer & seller where they have a reciprocal trading relationship.
F Value of rebates/over riders due to debtors. These amounts are ‘dilutive’ to the ABL’s eligible collateral.
Prime debtor limit set based on assessment of borrower & debtor credit quality combined with sale terms, payment history and location
G
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 The difference between the actual Availability generated from the Borrowing Base and the draw down required by the borrower.
Asset-Based Lending
12
Inventory carries a much higher risk profile, appraisal which is payable by the borrower. The
particularly since it changes regularly, so typically debt quantum and the loan amortisation are
attracts up to 75% of appraised value (which linked to both the borrower’s ability to service
would be based on the lender’s ‘net orderly and repay debt from free cash flow and the
liquidation value’, and which would also include valuation of the applicable asset.
details of how the assets would be sold). See
Plant and equipment is typically offered around
Figure 3b for an examples of an inventory
75p in the pound against an ex-situ/appraised
borrowing base.
forced-sale valuation whilst property would
Fixed asset term loans are not considered attract a similar rate, but would also be subject
suitable for borrowing bases and as such are to lender valuations based on a 365 day open
structured as straightforward amortising term market value to take into account a potentially
loans. They are always subject to a third party longer sale process.
Combined gross value of all Raw Materials, Inventory Borrowing Base (NOLV based Appraisal)
A Work In Progress and Finished Goods held 31/10/2014
by the borrower. £M GBP Per Appraisal Per Underwrite
Gross Inventory at Cost A £5,953,223 £5,953,223
Exclusions for slow moving, obsolete, Less:
returned Inventory, Raw Materials or goods Excluded B £2,000,248 £2,000,248
B
subject to ROT, Packaging , WIP, stored at a Appraised Inventory at Cost Price £3,952,975 £3,952,975
third party location, damaged...
Gross Orderly Liquidatiion Value C £5,533,203 £5,533,203
Inventory value derived from historic sales
C & margin, mix and cost analysis by the Less:
appraiser. Liquidation Expenses D £974,958 £974,958
Net Orderly Liquidation Value £4,558,245 £4,558,245
Appraisers calculation of all costs associated
with liquidating and disposing of all inventory Advance Rate 85% 85% E
D Gross Availability £3,874,508 £3,874,508
in a given period of time via a preferred
method. Usually 120 days.
Less:
The Advance Rate the ABL determines is Specfic Reserves £0 £30,000
appropriate for the types of inventory being Enterprise Act £600,000 £600,000 F
E funded taking into account the appraisers Preferential Creditors £40,000 £40,000
comments, recommendations and the Net Availability £3,234,508 £3,204,508
overall transaction and lending structure Effective Advance Rate on cost 54% 54%
£4,000,000 £20,000,000
Total Availability
£3,500,000 £17,500,000
Headroom
£3,000,000 £15,000,000
TOTAL AVAILBILITY
HEADROOM
£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
£0 £0
Oct 14
Nov 14
Dec 14
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
Dec 15
Statutory
Inventory
Gross Ineligible Net
Eligible Advance
Rate Reserves Availability Drawdown Headroom Facility
Cap
Accounts
Receivable
(i) £18,183,301 £1,590,375 £16,525,038 85% £14,046,282 £9,875,000 £4,171,282 £18,500,000
Inventory
(i) £5,533,203 £974,958 £4,558,245 85% £670,000 £3,204,508 £1,602,254 £1,602,254 *
see
below
Machinery
&
Equipment
(ii) £2,500,000 £2,500,000 75% £1,875,000 £1,875,000 £0 £2,625,000
Freehold
Property
(iii) £2,000,000 £2,000,000 75% £1,500,000 £1,500,000 £0 £1,800,000
Cash
Flow/Air
Ball/Top
Slice
(iv) £2,000,000 £2,000,000 £2,000,000 £0 £3,600,000
£30,216,504 £25,583,283 £22,625,790 £16,852,254 £5,773,536 £26,525,000
*
Inventory
is
a
£4,000,000
sub
limit
of
the
AR
facility
Monthly
Term Profile Amortisation Annual
Amortisation Bullet
on
Maturity
i.
Revolving
facility 5
Year Revolving £0 £0 £0
ii.
5
Yr
fully
amortising
term
loan
@£31,250
p/m 5
Year Term £31,250 £375,000 £0
iii.
10
Yr
amortisation
profile
5
yr
term
@
£12500
p/m 5
Year Term £12,500 £150,000 £750,000
iv.
3
Yr
amortisation
profile
@
£55,583
p/m 3
Year term £55,583 £667,000 £0
£99,333 £1,192,000 £750,000
Asset-Based Lending
14
Figure 6: Transaction Sources and Uses
Fig
6.
Transaction
Sources
&
Uses
1. The total of Accounts
SOURCES USES Receivable and Inventory
ABL
Revolver
Availability £17,250,790 Purchase
Price £20,104,111 Availability in the ABL Capital
ABL
Term
Debt
Availability £5,375,000 Working
Capital £1,448,143 Structure (Figure 5, page 14)
Deferred
Consideration £0 All
Fees £900,000
Management
Equity £300,000 Headroom £5,773,536 2. The total of Machinery
Sponsor
Equity £300,000 & Equipment, Freehold
Sponsor
Loan
Notes £5,000,000 Property and Cash Flow/
TOTAL £28,225,790 £28,225,790 Air Ball/Top Slice Availability
in the ABL Capital Structure
£26,525,000
x
100
(Figure 5, page 14)
ABL
Closing
fee
100
bps bps
=
£265,250
Capital structure
Once the borrowing base has been calculated “As each borrower and asset
the ABL will assess whether the size and base is different, reporting
structure of the revolving facility, when
requirements will vary”
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.
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.
“Use legal counsel that has a specialist banking team familiar with and
experienced in asset-based structures”
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.
Asset-Based Lending
16
The ABL loan document contains much that
is familiar from leveraged loan documents Syndication
but are not yet standardised in the way LMA There is an active ABL syndication
documents have become. For instance, there market, with cooperation driven by the
are provisions solely related to the asset base ABL providers themselves rather than
and information provision and monitoring that capital markets intermediaries. ABL
are not found in leveraged loan documents. providers tend to have a good working
Prior to the drawing up of legal documents, relationship, and regularly collaborate to
the private equity sponsor may have several deliver larger lending facilities.
points of negotiation to the Offer Letter In addition, there is an active cross-
before deciding upon a final ABL provider. border syndicated ABL market in
The Financial Director of the target company operation with US ABLs investing into
may also have opinions about the facility that the UK and Continental Europe, as well
could change things. But assuming there are as several home grown providers. Some
no real obstacles (and there very rarely are at of the largest European ABL deals have
this stage), and condition precedents can be been the ‘foreign’ components of US
satisfied, we move to the final step. originated deals, with recent examples
The ‘Take-on’ of European collateral sub-limits
This refers to updating collateral reports and pushing the US$1 billion mark; although
agreeing the final availability figures. The it should be noted that these have been
Relationship Manager of the ABL provider will for large international corporates with
then guide the management through the ABL strong credit ratings.
systems and processes, and provide manuals When considering cross-border
and tutorials. transactions, it is important to know
After this point, the transaction process is your lenders, and be comfortable with
finally complete. 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.
Asset-Based Lending
18
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.
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 We served as Joint Lead Arranger on an asset-based credit facility that supported
Spirits distiller the acquisition of Loch Lomond by Exponent Private Equity.
Kurt Geiger We provided a global asset-based financing solution to support the acquisition of
Luxury footwear The Jones Group by Sycamore Partners and the subsequent management buyout
retailer of Kurt Geiger.
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 PNC Business Credit Wells Fargo Capital Finance
Commercial Finance
BNP Paribas is a leader in ABL At PNC Business Credit, ‘Done Deal’ Wells Fargo Capital Finance provides
across Europe and beyond. is more than a tag line. It defines our comprehensive asset-based lending
business. and technology finance to a wide
With operations from Portugal in the
spectrum of companies across
west to Turkey and in the east we PNC Business Credit is one of the
the UK. With offices in London,
offer an unrivalled capability to fund leading U.K. Asset-Based lenders
Birmingham, and Manchester, we
asset based deals in 15 European to the Private Equity community,
bring a strong and proven track
jurisdictions. advisors and companies alike.
record of working with clients
We provide funding solutions for
We combine the balance sheet to develop their businesses. We
mid-market companies that deliver
strength of one of Europe’s leading deliver flexible financing options
detailed understanding and flexibility,
banks with the local expertise of ABL for companies facing a variety of
combined with unparalleled client
practitioners on the ground to deliver situations, including: early and
access to our senior team
appropriate ABL funding solutions mid-stage turnarounds, growth,
to a range of corporate clients. Our Optimum levels of finance for event leveraged buyouts, refinancing,
products range from simple single driven change restructurings, and mergers and
country debtor funding through acquisitions.
• Mergers & Acquisitions
non-recourse solutions to multi-
• Management Buy Out/Buy In We work with public and private
jurisdictional asset based lines.
• Recapitalisation UK-based companies, in addition
Our people have considerable • Refinance to US and Canadian businesses,
experience in working alongside • Growth and multinational businesses with
Private Equity in a variety of • Restructure/Turnaround operations in the UK, Western
transactions both in the UK Europe, the US, Canada, and
PNC finds value in;
and across multiple European beyond. As part of Wells Fargo &
jurisdictions and beyond. • Accounts Receivable Company, a leading financial services
• Inventory provider with a long-standing
As the ABL arm of one of the best
• Machinery reputation for strength and stability,
capitalized banks in the world, we
• Freehold Property we can offer access to a wide range
stand ready to assist the Private
• Intellectual Property – Brands of products and services aimed at
Equity community in creating value
helping companies succeed.
both within existing portfolios and PNC Business Credit is part of the
across new acqusitions. United States based PNC Financial For more information, visit
Services Group Inc, a retail banking www.wellsfargocapitalfinance.co.uk
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