Before the financial crisis, asset-based lending (ABL) was a debt product on the fringes, the place to go when trouble loomed, and mainstream lenders had shut their doors. Although it is still seen as a niche product by many, especially in the private equity industry, a thriving community of independent providers have worked hard to change perceptions and show sponsors what they can do.
It hasn’t always been easy. Debt is plentiful and direct lenders have swooped in and rapidly grown market share. But ABL has been making inroads. According to UK Finance, the number of businesses using ABL facilities now stands at 40,000. Uptake among companies with a turnover of £10m or more is rising too.
Andy Dimmock, Debt Advisory Partner at FRP in London, speaks to Nicholas Neveling, editor at Real Deals, about how ABL is gaining traction in the M&A space for the publication’s Debt Uncovered podcast series, hosted by Shawbrook Bank.
How does the private equity market view ABL today, and have attitudes changed in recent years?
The sponsor market is much more aware of the ABL market than it was 10 years ago. At that time, ABL was viewed as a turnaround-type product, led by the balance sheet rather than the earnings. Businesses that didn’t necessarily have the earnings profile to arrange a traditional leverage facility would go down the ABL route. Through a lot of hard work from the ABL lenders themselves, they’ve made their product sit well and the private equity market accept it. There’s huge appetite in the ABL community to work with private equity. Although it is still a valuable option for turnarounds, it is now also a viable product for growth.
In my conversations with sponsors there’s sometimes a view that the business model for some providers is to make the margins on the fees, rather than the principle interest on the loan. Is that still something you see in the market?
I don’t see fees as an issue. ABL has matured as a product set and is very focused on working with the private equity community. The key is not the mix of fees but the blended cost of capital with ABL often coming in at a lower price than leverage. That’s why it’s helpful for businesses to use an adviser when exploring their options, with this adding a competitive dynamic to the process and ensuring facilities are ‘best in class’. It pays to have an expert unpick it.
What are some of the big changes pushing the ABL product up the agenda?
10 years ago, the standard documentation was very much an on-demand facility which didn’t really suit a sponsor-backed transaction, but the ABL providers focused on the sponsor community have worked very hard to bring their documentation in line. Although there is no loan market association (LMA) standard per se, you have far more committed documents now. You do have to understand how the balance sheet moves through a year to operate with an ABL facility, but the covenants are far clearer so you do know exactly how the facility will work.
How suitable is ABL for mainstream deals, and is there room for a growth in the size of cheque?
ABL has moved significantly, and it’s now a real fit for mainstream buyouts. Asset-based lenders have enabled themselves to enter that market by being able to go beyond the balance sheet. That pushes it toward stronger credit scenarios.
There’s always room for growth. 10 to fifteen years ago, transactions at the £50-£60 million mark were few and far between, whereas they are now commonplace. If the ABL community does continue to move the dial to £100 million as a hold position, that would be a positive.
Is it suitable for periods of volatility?
ABL has been around for a while now, and so has been through a number of economic cycles. In terms of the structure of the facilities, if correctly structured it is very clear how ABL will work, even in the event a downturn.
40,000 UK businesses now use ABL facilities