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A Guild To Asset-Based Lending PDF
A Guild To Asset-Based Lending PDF
June 2014
A Guide to
Asset-Based Lending
Businesses with increased liquidity and working capital needs may find an asset-based loan (ABL) to be an
attractive alternative to conventional bank financing.
More liquidity. Fewer restrictions.
Four scenarios
ABL can provide an attractive alternative to cash-flowbased bank financing by generating more liquidity in certain
circumstances, and encouraging more efficient working
capital management. It also subjects the borrower to fewer
and less restrictive financial and negative covenants. Assetbased lending does this by utilizing a companys current and
noncurrent assets as building blocks for its debt structure,
focusing on liquidity and relying on collateral monitoring
for comfort.
1
2
Growth
Capital expenditure needs
Working capital needs
High organic growth
Solutions
Restructuring/DIP
Traditional ABL
3
4
Expansion
M&A
LBO
Geography/Product
Senior Stretch
Junior Capital
Capital Markets
Debt maturities
Stock repurchase
Dividends
Traditional ABLs
What are the various types of asset-based loans available
to middle-market businesses to provide the senior debt
financing in these situations? Traditional products include
revolving lines of credit, or revolvers, and term loans. In
these structures, the lender takes a first-priority security
interest in the assets pledged as collateral for the loan.
Revolvers
An asset-based loan is commonly structured as a revolving
line of credit without a scheduled repayment, and on an
interest-only basis. A revolver allows a company to borrow,
repay and reborrow as needed over the life of the loan
facility or agreement. The lender advances funds based on a
percentage of the accounts receivable (normally 7085%)
and inventory. A borrowers inventory is typically based on
the lesser of either 070% of the lower of cost, or market,
depending on the category of inventory; or a percentage:
Term loans
Like a revolver, a term loan is dependent on the composition
and amount of available collateral and cash flow to support
debt service. In a term loan facility, lenders are more willing
to advance against machinery and equipment than real
estate. The entire amount typically is advanced at closing,
with repayment of principal and interest amortized over
a period ranging from 5 to 15 years depending on the
composition of the collateral or the unamortized balance
due at maturity of the credit facility.
to 75% of the FMV of the real estate. For some fixed assets
such as a chemical plant or other operations that would likely
be sold in an intact sale, in the case of a failed non-operating
entity, a liquidation value-in-place concept may apply.
In these cases, the lender would typically apply a lower
advance rate against the appraised value (e.g., 5060%).
Lenders typically define debt service coverage as earnings
before interest, taxes, depreciation and amortization
(EBITDA), less cash interest, cash taxes, unfinanced capital
expenditures (CAPEX) and distributions (dividends) divided by
scheduled principal payments on indebtedness. The standard
is to look at these items on a trailing 12-month or fourquarter basis. (Certain add-backs to arrive at an adjusted
EBITDA may be acceptable.)
Structured advances
Structured out-of-formula advances (structured advances)
may be available for acquisitions, recapitalizations and other
special situations. They may also be appropriate for short
seasonal periods. A structured advance is a hybrid financing
solution that falls between an asset-based loan and a
cash-flow-based loan for companies that have more marginal
free cash flows (e.g., due to high levels of unfinanced
capital expenditures), because the borrower operates in
a more cyclical industry or lacks all of the business value
characteristics that would qualify the borrower as a cash
flow lending candidate. Also known as an over-advance
loan, it is structured with both asset-based and cash flowbased components, providing a higher level of leverage and
delivering more capital up front than do loans based solely
on typical ABL advances against collateral.
This type of loan is often used when a company has
demonstrated pro forma historical and projected ability to
service its debt, including amortization of the structured
advance. Common uses of a structured advance are in
connection with leveraged buyouts, acquisitions and
recapitalizations. While priced at a premium to a typical
ABL facility on a blended cost-of-capital basis, the pricing
is attractive compared to the cash flow lending market.
Typically structured advances are amortized over a period
not to exceed three years. There may be an excess cash flow
(ECF) sweep applied to the over advance (e.g., 50% of ECF).
FILO tranches
First-in last-out (FILO) tranches are used within a
revolving credit facility as another way of increasing the
overall amount of the loan. FILO tranches started in the
retail-finance segment of the market, but are now also
being utilized for distributors and wholesalers and,
even more recently, manufacturers.
Structuring considerations
In providing intellectual property advances, structured
advances and FILO tranches, lenders generally prefer to
Priority of Claim
on Assets
First
Last
Secured
Traditional Products/Structures
ABL Revolver
UnitranchePro Rata
First Out/Last Out
Mezzanine Debt
Convertible/Preferred Securities
*Bifurcated Secured Term Loans have first lien on fixed assets and are used in conjunction with an ABL Revolver
Alternative Products/Structures
Unsecured
Borrower size, credit quality and industry sector greatly influence leverage and terms available within middle market
Financing structures that pair ABL revolvers with term loans (i.e. traditional cash flow, bifurcated and unitranche) have become
increasingly popular due to relative flexibility and favorable pricing
As Business Development Companies (BDCs) remain active and aggressive across all loan segments, borrowers have increasingly
tapped these non-traditional sources of debt capital by turning to alternative products and creative financing options
With junior collateral providers focused on leverage both from a Debt/EBITDA stand point as well as a Loan/Enterprise
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