Taking stock of asset-based lending

In times of recession, many would expect asset-based lending facilities to come to the fore, as it is certainly a more efficient use of banks' capital. Not so, however, according to recent research by the British Asset Based Finance Association (ABFA), which shows that asset-based lending facilities dropped by 8% last year to £191.3bn from 2008 figures.
"Unless you can offer a holistic approach, it is not always possible to compete with traditional acquisition finance packages. As a result, 90% of our asset-based deals have cashflow lending facilities on top," says James Stirling of Investec Growth & Acquisition Finance.

But some believe this has the potential to change. In fact, despite the drop in asset-based facilities last year, each quarter demonstrated an upward trend, an indication that this type of facility could make a comeback in 2010. Stirling continues: "People are definitely more open to asset-based lending as a way of financing deals than they were two years ago, and they are forming a much larger proportion of our deal introductions, albeit deal volumes are clearly well down on where they were two years ago."

Still though, Investec expects its asset-based loan book to substantially increase this year as arranging traditional credit remains challenging, according to Stirling. "If a buyer can't get 3x or 4x senior leverage, they have to consider alternative ways of financing, and utilizing an asset-based platform may be a cost-effective way of achieving the desired outcome."

Indeed, asset based finance-backed businesses generated sales of £50.3bn in fourth quarter of last year, an increase of over 10% from Q1 2009 when sales were £45.7bn. Asset-based packages are increasingly attractive to companies given the lower regulatory capital requirements when compared to traditional overdraft lending and the positive impact the structure of such facilities can have on the cash flow of a business.
Only time will tell if this has the potential to translate into an increase in asset-based lending this year.

To read the extended version of this feature, refer to the next issue of unquote" - out 22 March.