Asset Based Lending

Part One Introduction

• Two approaches to the credit decision Cashflow-based lending

• Asset-based lending (ABL)

A summary of corporate funding options

How ABL is distinguished from other asset-related finance techniques

• Asset-backed lending

• Asset finance compared

Which types of firms are not suitable for ABL

Key concepts in Asset-Based Lending

• The 'Borrowing Base'

• The Advance rate

• 'Headroom'

• The Reserves

Use and application of the ABL revolving credit facility in banking

• M&A

• Restructuring

• General corporate purposes

• Other

Collateral in ABL: Why and How it Matters

• This ABL training explores the role of collateral

• Key issues Ranking/priority

• Control of the collateral

Why share pledges matter

Fixed and floating charges

Key differences

Issues with floating charges (affects the UK only)

• Why are they essential to ABL & other lenders?

• What is a floating charge, and what assets does it cover?

• Floating charge pros & cons

• Differences between the Floating Charge Holder and the Qualifying Floating Charge Holder; why this matters

• Review key cases: Spectrum, Avanti, Agnew

Crown Preference issues (affects the UK only)

• Who and what it affects

• Specific problems it has created Blocked asset sales

• Restructurings (CVAs more challenging)

• Increased costs

• Lower advance rates

• Reduced flexibility for borrowers

• Enhanced reporting & valuations

Issues with collateral in the EU / Key differences to the UK

• ROT issues in Germany, Austria

• No floating charge

• Employee priority (Italy)

• Enforcement challenges

• Additional Reserves (Germany, France, Italy)

• Mitigating factors in the EU

Financing Accounts Receivable ('AR')

• The basic approach

• Asset-backed loan vs debt purchase structure Confidential Invoice discounting

• Disclosed Invoice discounting

• Full-service Factoring

Key differences between discounting and factoring

Critical legal issues for lenders

Key accounting issues - off-balance sheet or not requirements

• Recourse vs Non-recourse

• Credit insurance – key issues and tips

Ineligible AR – review of typical ineligible

Review of pro forma funding calculation

Other typical limits

Typical Reserves

Dealing with commodities and other volatile raw material inventory

• Specific categories – agricultural commodities, precious metals, chemicals

• Challenges with fixed advance rates & potential solutions

• Dynamic advance rate structures

• Two-tier advance rates linked to hedging

• Reserves specific to commodity collateral

• Commodity-specific structuring

• Key documentation provisions

Case Study: Calculate the effective advance rate on AR

Inventory Financing

• ABL training assesses what types of inventory qualify for financing Finished goods

• WIP

• Raw materials/commodities

Pro-forma funding calculation

• Inventory valuation vs funding valuation

• Gross Orderly Liquidation Value vs. Net Orderly Liquidation Value

Typical list of ineligible stock

Calculating the Advance

Key risks for the lender

• Collateral - Fixed or Floating charge

• Value leakage

• Retention of title issues

Issues arising from the Crown Preference and how lenders have responded

Specific reserves that may affect recoveries re: inventory

• Prescribed part

• Crown preference

• Landlord’s “distraint”

Risk Mitigants

• ‘All monies’ clause

• ‘Mixed Goods’ clause

Insurance issues

Key risks for the lender

• Ownership/title issues

• Is it a Fixture?

Specific issues with 'branded' products

Part Two

Supply Chain Financing (Reverse Factoring)

• Key steps in the process

• Key benefits: For suppliers

• For buyers

• For funders

Risk mitigation

Typical examples

Plant, Machinery & Equipment

• What types of PME qualify

• Typical terms of the facility Margins, amortisation and tenors

• Recent developments

Key concerns for the asset-based lenders

• Ability to sell/relocation

• Nature of PME – is it specialised/industry-specific?

Advance rates

Pros and cons of other forms of funding (leasing, vendor finance)

Legal issues – Taking adequate security

• Plating (why it isn’t always an option)

• Attachment – is it a fixture or a fitting

Lessons from the Arena TV case

Real Estate

• What types of property qualify?

• Advance rates

• Valuation issues

• Key terms of the ABL facility loan Margins, amortisation and tenors

Pros & cons of using asset-based lending vs specialist lenders

Legal issues – taking adequate security measures

Intangible Assets

• What types of intangibles qualify?

• The rationale for leveraging intangibles (unlocking hidden value)

Cash Flow Based Loans

• Typical terms, tenors and margins

• Recent trends re: cash flow strips Rationale

• Balloons

• Payment holidays

• Extended tenors

Potential pitfalls for the parties

Annual Recurring Revenue ('ARR')

• What are they?

• Use and application Typical sectors

• Typical assets

Calculating the borrowing base

Calculating the Advance rate

Documentation issues

• Financial maintenance covenants

• Other key commercial terms

Documentation: An Overview of a Typical Term Sheet

• Review of main headings

• The security package

• Information & Reporting requirements

• Financial covenants Why and when

Operational undertakings

• Defining 'dilution'

Reps and Warranties – typical

Events of Default

Fees/charges (one size does not fit all)

The lender’s approach to margin, fees/charges

Other costs and expenses

Exit/termination fees

• Typical' fees – review various options

• Typical triggers

• Issues for borrowers to consider (potential pitfalls)

Debt Advisory – key considerations in the use of ABL

• Asset based lending courses at Redcliffe explore when to recommend ABL: identifying the right borrower profile and asset base

• Typical sectors and borrower types Manufacturing, wholesale distribution, equipment rental, and inventory-rich businesses

• Alcoholic beverages, food and drink, and consumer goods (whisky, wine, and similar asset-rich businesses)

• Firms with strong AR, commodity-linked inventory, or significant capital equipment

ABL vs cashflow lending — structuring trade-offs, pricing dynamics, and when a hybrid structure adds value

Advantages and disadvantages of ABL — what debt advisers need to explain to clients

• Enhanced liquidity tied directly to asset value; availability grows with the business

• Can provide cheaper or more flexible funding than a conventional RCF

• Often accessible where traditional cashflow lending is unavailable or constrained

• Onboarding burden, ongoing reporting, and cash dominion — managing borrower expectations

• Availability can contract rapidly if asset values or debtor quality deteriorate

Key diligence questions for debt advisers: asset quality, debtor concentration, ineligibles, and historic utilisation

How lenders assess and stress-test the borrowing base — what advisers need to anticipate before going to market

Use in restructuring and M&A

• ABL as a rescue or stabilisation facility in distressed situations

• Super-senior ABL revolvers alongside term loan B and unitranche structures in leveraged buyouts

• Adding an ABL tranche to an existing structure or refinancing out of cashflow lending

Key intercreditor issues for the debt adviser

• Security — resolving competing claims over collateral between the ABL lender and other creditors; review of typical approaches

• Enforcement standstills — managing conflicting agendas between the ABL lender and other funders

• Option to purchase — what it is, when it arises, and whether it helps

• Consents and waivers — navigating the ABL lender's approval rights in a multi-creditor structure

Market overview: bank lenders vs fund-backed and non-bank providers — differences in appetite, pricing, advance rates, and flexibility

Case Study: Review key conflict issues between the asset-based lending process and other funders

Case Study: Advising on an ABL refinancing — identifying the optimal structure and lender universe

Training Objectives

• Gain an appreciation of the asset-based lending process in tandem with other funding sources

• Understand when Asset-Based Lending is and is not suitable, as well as the choice of funding

• Master the key intercreditor issues applicable to ABL

• Understand the financing of accounts receivable (AR) in ABL

• Know the relevant issues in revolving inventory and plant, machinery and equipment

• The relevance of ABL to real estate, including a comparison with specialist lending

• Asset based lending training also includes an overview of a typical term sheet and commentary thereon

Training Course Summary

Background

In recent years, ABL has gained traction in Europe as well as globally. Borrowers have sought broader funding solutions in the face of challenging economic and geopolitical conditions. Competitive pricing versus traditional working capital facilities typically provided by RCFs from banks, which have become more expensive as interest rates have escalated, has boosted interest from borrowers.

Commitment fees are also much lower. Increasing acceptance as a funding option, especially by PE sponsors. ABL lenders have worked hard to offer greater flexibility to borrowers, e.g. by providing committed facilities and a higher proportion of cash flow strips as part of their funding package. Sector specialisation in ABL providers. The rise in specialist providers with deep knowledge of specific industries has allowed these lenders to provide tailored funding solutions to meet borrowers’ needs. The challenging economic climate caused by COVID-19, geopolitical events, and dislocation in energy markets has boosted risk aversion in traditional lending.

ABL, with its focus on asset values which endure post-distress, offers lenders a lower level of risk and higher recoveries post-default. Technological developments have made ABL more efficient and data-driven. Asset-Based Lenders increasingly use software to streamline asset valuation and monitoring, which has improved decision-making and reduced risk.

Challenges in ABL:

• Despite these benefits, ABL has a greater complexity in bifurcated deals, especially in structuring the intercreditor issues between ABL and traditional cash flow-based lenders.

• ABL relies on collateral - primarily on the value of their collateral so lenders are keen to ensure they have full control over their assets pre and post-distress and the fact that it.

• Lengthy Initial setup takes longer as lenders need to audit the paper trail and appraise the asset values.