| But as companies confront a tight credit market | | | | a company. |
| coupled with lower than expected results, many | | | | Recapitalization |
| CFOs are viewing asset based lending as a viable | | | | Recapitalization is the process of fundamentally |
| option in the financing tool kit. Even successful | | | | revising a company's capital structure. A company |
| companies with strong banking relationships can | | | | might recapitalize due to bankruptcy or replacing debt |
| quickly fall out of favor with lenders and lose access | | | | securities with equity in order to reduce the |
| to unsecured financing, especially if they've shown | | | | company's ongoing interest obligation. A leveraged |
| recent losses. A few bad quarterly results doesn't | | | | recapitalization typically achieves just the opposite--by |
| necessarily mean that a company is in bad shape, but | | | | taking on a material amount of debt, the company |
| stringent bank underwriting parameters can cause | | | | increases its ongoing interest obligation but is able to |
| existing loans to be called and prevent the firm from | | | | pay its shareholders a special dividend. |
| qualifying for new financing. A company facing such a | | | | Refinancing/Restructuring |
| scenario can use asset based lending (ABL) | | | | When a company enters or exits a growth stage, |
| arrangements as bridge loans to pay off banks and | | | | refinancing or restructured financing may be key to |
| provide liquidity until bank financing is achievable. | | | | creating a capital structure that better meets the |
| What is asset based lending? | | | | needs of the company. This type of financing is |
| An asset-based loan is secured by a company's | | | | often used for market expansion, completing an |
| accounts receivable, inventory, equipment, and/or real | | | | acquisition, restructuring operations, or following a |
| estate, whereby the lender takes a first priority | | | | successful corporate turnaround. |
| security interest in those assets financed. | | | | Buyout |
| Asset-based loans are an alternative to traditional | | | | A buyout is the purchase of a controlling percentage |
| bank lending because they serve borrowers with risk | | | | of a company's stock. In a leveraged buyout (LBO), |
| characteristics typically outside a bank's comfort level. | | | | the acquiring company uses the minimum amount of |
| These assets typically have an easily determined | | | | equity to purchase the target company. The target |
| value. The financing can take the form of loans to | | | | company's assets are used as collateral for debt, and |
| revolving credit lines to equipment leases and can | | | | its cash flow is used to retire debt accrued by the |
| range from $100,000 to $1 billion, depending on needs | | | | buyer to acquire the company. A management |
| and circumstances. | | | | buyout (MBO) is an LBO led by the existing |
| How can ABL be a beneficial financing option? | | | | management of a company. |
| Acquisition | | | | What are the advantages to ABL? |
| To grow a business, a company may look to acquire | | | | · Tends to feature fewer covenants than |
| a strategic partner or even a competitor. | | | | other types of financing and those it does include |
| Asset-based financing is often an efficient means to | | | | tend to be more flexible. Cash flow loans, by |
| obtain funding for business acquisitions. | | | | contrast, often have four or five covenants including |
| Turnaround Financing | | | | total leverage, fixed charge coverage, and minimum |
| Turnaround financing is often used by | | | | net worth. |
| under-performing businesses that are not achieving | | | | · If a company is growing, the receivables |
| their full potential. In some cases, it is used for | | | | and inventory it uses to secure the asset based loan |
| businesses that are either insolvent or on their way | | | | is likely growing as well. Thus, the company has a |
| to becoming insolvent. Asset-based lenders are | | | | greater collateral base and can borrow funds to fuel |
| accustomed to the bankruptcy process and | | | | its growth. |
| asset-based financing is ideal for turnarounds because | | | | · ABL instills discipline. Since the loans are |
| of its flexibility. | | | | based upon accounts receivable and inventory, the |
| Capital Expenditures | | | | company is motivated to improve collections and |
| Capital expenditure is the money spent to acquire | | | | complete the production cycle in a timely manner. |
| and/or upgrade physical assets such as buildings and | | | | · As mentioned earlier, ABL imposes less |
| machinery. Capital expenditure is also commonly | | | | stringent covenants compared to cash flow loans. |
| referred to as capital spending or capital expense. | | | | These type of loans also provide better security to |
| Debtor-in-Possession (DIP) Financing | | | | the lenders, which in turn allows them to grant more |
| Debtor-in-possession (DIP) refers to a company that | | | | time to the borrowers to turn their company around |
| has filed for protection under Chapter XI of the | | | | in difficult times. |
| Federal Bankruptcy Code and has been permitted by | | | | What are the disadvantages of ABL? |
| the bankruptcy court to continue its operations to | | | | · Since the level of funding is contingent |
| effect a formal reorganization. A DIP company can | | | | upon the asset values on the balance sheet, there |
| still obtain loans--but only with bankruptcy court | | | | may not be sufficient liquidity. Only asset rich |
| approval. DIP financing, which is new debt obtained | | | | companies would likely benefit, while many service |
| by a firm during the Chapter XI bankruptcy process, | | | | companies would not. |
| allows the company to continue to operate during a | | | | · Such a requirement can be difficult for the |
| reorganization process. Asset-based lenders also | | | | company. |
| provide exit financing or confirmation financing to | | | | · Asset based lending tends to be more |
| companies coming out of bankruptcy. | | | | expensive than other types of financing, often three |
| Growth | | | | to five percentage points above traditional bank |
| Typically, as a company grows so does its need for | | | | financing. |
| financing. Also, as a company's collateral grows, its | | | | · ABL runs counter to the thinking of a lot of |
| assets can strengthen its ability to borrow. An | | | | CFOs who believe it is dangerous to tie short term |
| experienced and creative asset-based lender can | | | | assets to long term financing. |
| assemble a credit facility that can scale to grow with | | | | |