BVCA Guides

GUIDE TO
Asset-Based Lending

In association with
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A Portfolio Company A portfolio Company A portfolio company of Endless LLP

of Vision Capital of Exponent Private Equity & Phoenix Private Equity

£40,000,000 £Multi-Million £40,000,000

Asset Based Lending Asset Based Lending Asset Based Lending

Chilled Savoury Food Whisky Distillers Auto Parts

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A Portfolio company of A Portfolio company of A Portfolio company of

Maven Capital Partners Rutland LLP Synova Capital LLP

£8,400,000 £15,000,000 £9,000,000

Asset Based Lending Asset Based Lending Asset Based Lending

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Contents

Foreword 5

Introduction 6

How does ABL differ from leveraged loans? 7

What to expect – the ABL process 9

Structuring the deal 11

Final steps 16

Conclusion 18

3
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Foreword
Asset-based lending (ABL), much like private equity, has over
the last decade experienced a significant transition from niche
sector to the mainstream, providing a genuine alternative to more
traditional forms of finance.

Indeed, in December 2014 the Asset Based Finance Association reported that asset-based
finance (which includes both ABL and invoice finance) represents a considerable 15.7% of
the UK’s GDP. Key to this growth was the recession – as the traditional investment banks
withdrew from the market, more and more businesses turned to asset-based lending as a way
of raising finance. According to PwC, there was a 33% increase in the level of assets financed
between 2006 and 2012.
Post-recession, appetite continues to be strong, not least of all amongst private equity
sponsors where it is an increasingly common feature in funding packages. This guide provides
an introduction to asset-based lending, outlining the concept and how it differs from leveraged
loans, and then walking through the ABL process, from issuing the Information Memorandum
to deal structuring and transaction completion.
The BVCA Guide to Asset-Based Lending is part of our series of guides designed to
provide an overview of new markets and strategies for the private equity and venture capital
community. Produced in association with BNP Paribas Commercial Finance, PNC Business
Credit and Wells Fargo, we hope you find it both useful and informative.

Tim Hames
Director General
BVCA

Foreword
5
 Introduction
Borrowing against a company’s assets can be a simple and
inexpensive way of funding acquisitions, recapitalisations and
working capital requirements.

The borrowing process differs from leveraged loans, since the lender is particularly interested in
the nature and value of a company’s assets rather than simply its quality of earnings. Because
the value of some such assets changes regularly, asset-based lenders require a greater degree
(and frequency) of disclosure from the borrower than might be the case with a leveraged loan.
This has advantages for all parties since it engenders a close and open partnership between
borrower, lender and sponsor, where surprises are rare and challenges are revealed quickly and
dealt with early-on. Consequently in situations where a borrower needs additional support, the
lender can normally move very quickly given their high level of insight and engagement with the
borrower.
In this way asset-based lenders are very interested creditors, in a similar way that private equity
sponsors are very interested owners.
Asset-based lending (ABL) can work for a variety of businesses across a wide range of
sectors, and is an increasingly common component within structured finance packages and
cross-border transactions.
This is a guide to how the asset-based lending process works.

Peter Jones
Director Sales & Graham Barber Steven Chait
Marketing UK Business Development & Managing Director,
BNP Paribas Marketing Director EMEA Regional Head
Commercial Finance PNC Business Credit Wells Fargo Capital Finance

Asset-Based Lending
6
How does ABL differ from
leveraged loans?
For the borrowing company the main
difference between ABL and leveraged loans
is the flexibility of the borrowing facilities.
Rather than fixed term loans that are fully
drawn and amortize over time, much asset-
based borrowing tends to be provided on a
revolving basis, more like an overdraft facility
than a term loan.
Since the size of that facility depends on the
(fluctuating) value of a company’s assets, the
lender needs to know what is going-on in real-
time. This leads to the second difference to
“The relationship between borrower and lender is a close one”
How does ABL differ from leveraged loans?
leveraged lending: the relationship between
borrower and lender is a close one, with a high
degree of engagement and transparency.
Another big difference is that ABL does not
come with a myriad of financial covenants – it
is not uncommon for there to be just one.
Where ABL is structured solely around working
capital assets (i.e. those focused on receivables
and inventory) the facility would typically carry
a simple ‘interest-cover’ financial covenant,
measured as total interest costs-to-EBITDA.
For a more structured facility encompassing
revolving and term debt the financial covenant
7
 would typically be in the form of a ‘fixed charge
coverage’ (to ensure the borrower can service
the debt repayment from its cash-flows.)
ABL structures do carry operational controls,
typically triggering a ‘conversation’ rather than
an event of default. That conversation and
consequent auditing may lead to a reduction
in the receivable or inventory advanced rates
or an increase in the facility reserves, but it
would typically not trigger a wind up of the
arrangement or transfer to the lender’s work-
out team.
This leads to another significant difference
between asset-based lenders and leveraged
lenders: specialist ABL providers have no
work-out teams. Once you have a relationship
manager on your ABL facility, that is the person
you will have throughout the life cycle of the
relationship.
For the company and private equity sponsor,
it may also be pertinent to note that ABL is
normally significantly less expensive than
leveraged loans. This is because banks are
required to calculate their regulatory capital
(under the various Basel Accords) based on
the probability of a company defaulting, as well
as by how much of the borrowing could be
recouped by the lender in the event of such
a default. The collateralised nature of asset-
based lending means ABL’s should suffer a
lower level of capital loss following a borrower
default when compared to a leveraged loan,
consequently lowering the cost of borrowing for
its customers.
Figure 1. below serves to graphically highlight
some of the key structural differences between
a typical asset-based lending loan structure
and that of a leveraged loan.

Figure 1: Leveraged loans vs ABL

Leveraged ABL

Basis of lend EBITDA multiple Asset value

Security Yes/No Always

Nature of facilities Amortising and bullet Revolving with amortisation on any fixed
asset components

Limit flexibility Hard limit Review limit – a function of asset values

Covenants Multiple Financial One financial with applicable collateral

performance covenants

Hold levels £m 25 - 30 30 – 60

Secondary market Yes Rarely traded after primary syndication

Ongoing financial information Limited Regular

Equity cheque From 20% From 10%

International Yes Yes but more difficult and usually restricted

to receivables

Number of Funders Many Fewer, owing to larger hold levels

Track record Mature Growing

Availability Fixed at commencement Variable – Dictated by asset-base but

capped by facility limit

Distributions Limited Permissible subject to tests

Typical pricing

Margin c. 450bps c. 175bps – 300bps

Upfront c. 400bps upfront c. 75-150bps

Facility pre-payment fee No Yes

Collateral Monitoring Fee No Yes

*This comparison is illustrative and could vary from lender to lender and individual credit policies and lending criteria.

Asset-Based Lending
8
What to expect –
the ABL process
An important difference is the ABL
‘transaction’ process. It is no more
complex or time-consuming than leveraged
lending, but it is different. The ABL provider
needs to know things (mainly about the
assets) that are not a standard component
of your typical Information Memorandum
documentation, and knowing what to look
out for should keep things on track
Information Memorandum
Like any other debt provider, an asset-based
lender will conduct an initial analysis based
on the provided Information Memorandum
(IM). ABLs care about the company’s position,
sector, and key customers and so on. But in
addition, an IM that contains some substantive
information on the company’s assets will be of
great use and ultimately enhance the efficacy of
the lending process. Figure 2 is an ABL wish-
list that would enhance the typical IM.
Based on the IM and its own research, an ABL
provider will assess the deal and ponder several
questions. Are the assets financeable? Does the
lending meet our criteria? Can we deliver the
required package in the required time frame?
If the answer to all these questions is ‘yes’,
then the ABL provider, borrower/sponsor will
meet to ensure there is agreement on all the
parameters, and if not, how any shortfalls can
be plugged.

Figure 2: Information Memorandum tick-sheet

General

Location of assets
Sector characteristics
Management experience and credentials
Ownership structure – current and proposed
Strength of company’s market position

Financial

Balance sheet – size and depth of asset base

Net worth – equity / retained profits
Historical and Forecast Capital Expenditure spending
Other trends (e.g. revenue performance, margin performance, overhead performance)

Assets

Receivables – sector and location of debtors, standard terms of sale, ageing of ledger,
dilution to the ledger – credit notes, presence of rebates
Inventory – split of finished goods / work in progress / raw materials / location
Plant & Machinery – type, unencumbered or funded, location, age, depreciation profile
Real Estate – location, freehold/leasehold, age, size, factory vs office space
Intangibles – does a brand have value?

What to expect – the ABL process

9
 Meeting the management
Dependent upon the type of transaction and
the level of access to the target company,
the ABL provider will commonly request a
meeting with the management team and ideally
visit the company’s main site of operations.
ABL providers will take a keen interest in
the company’s physical assets, operating
conditions and people during this process.
From here most ABLs will begin a gradual
process of information gathering and evaluation
aimed at making sure that the management
team are aware of the operating and information
requirements of an asset-based lend.
The final stage of this initial diligence will be
to gain access to more detailed business
information and up-to-date financial
information, commonly through a data-room.
The information will include elements such as:
management accounts, debtors and creditors
age listings, inventory ageing, forecasts and
applicable asset valuations.
Pre-investment proposal/approval
ABL providers are fiercely protective of their
reputation for delivering – and with good reason.
Without the comfort of proprietary deal flow (for
those ABLs that are not captive bank entities)
they are only as good as their last deal in a
competitive market. So the next stage is taken
very seriously: the pre-investment proposal,
which outlines the deal and is used to build
internal buy-in to ensure the ABL will, subject to
terms, be able to deliver. Following this, indicative
term sheets can be issued and a timeline for
completion of the deal can be agreed in principle.
How long this diligence takes depends on the
scale and complexity of the business and on how “ABL providers
dispersed its assets are, but expect between two are fiercely
to three days for a simple, single site business
protective
with accounts receivable-only facility, and up to
two to three weeks for complex, international of their
operations requiring multiple asset third-party reputation for
evaluations and appraisals. delivering –
and with good
Financial forecasting
While the field exams are taking place, the ABL
reason”
will be working assiduously to get comfortable
with the company’s financial forecasting
models. These will comprise an integrated P&L,
cash-flow statement and, importantly for ABL,
a balance sheet model that includes meaningful
detail on working capital and a pro-forma
opening balance sheet tracking out monthly,
for example, two years, and then annually for a
further three to five years.
The granular trading information on sales,
customers, contracts and terms analysed during
the field exam are now used by the ABL to
validate the sales and margin forecasts as well as
calculating the working capital borrowing base.
Forecasts should be compiled on the
same basis as audited accounts or at
least somehow reconciled to them, so that
historic audited accounts, current and
forecast management information tally, to
ensure a like-for-like comparison.

Due diligence
Now the real work begins for the ABL provider
and its advisers. It starts with on-site due
diligence (sometimes called the ‘field exam’ or
‘survey’) of accounts receivables, followed by
evaluations of other relevant ‘financeable’ assets,
such as inventory, and property, machinery
and equipment, as well as any relevant further
financial and commercial diligence.
Parts of this will be done internally by ABLs, but
where a third-party is likely to be used, and if
a private equity sponsor is speaking to several
potential lenders, it is common for the competing
ABL parties to agree to a specific third-party to
conduct certain parts of the examination on all
their behalves, subject to the sponsor/borrower
underwriting the cost.

Asset-Based Lending
10
Structuring the deal
Calculating the borrowing base
How much a company can borrow is Jargon buster
determined by its collateral base – i.e. its ADVANCE RATE: The ratio between the amount an ABL is
fundable assets – with debt secured through the willing to lend against a particular eligible asset, and the total
ABL’s priority fixed and floating charge on those value of that asset as determined during due diligence.
assets. The size of the facility is not necessarily
affected by under-performance of trading or DILUTION: The aggregate value of the shortfall between the
cash-flow. amount invoiced by a borrowing company and the amount
actually paid by that company’s debtors. Typical dilutions
To calculate the borrowing base for a transaction are credit notes, settlement discounts and any debit note
the ABL will evaluate the relevant assets (during adjustments. As an industry rule of thumb, advance rates are
due diligence), and deduct any ineligibles based on twice the level of dilution, plus 5. So, for example, if a
and specific costs associated with reclaiming company has 4% dilution, the advance rate would be 87%.
collateral to ascertain ‘eligible assets’, to which
they will apply an advance rate. HEADROOM: The excess availability from the borrowing base
over and above the actual forecast usage. ‘Headroom’ is to ABL
Eligible accounts receivable will typically attract what a revolving credit facility is to a leveraged loan.
advance rates of up to 90% since it constitutes
debt that is independently supported and a
statutory contractual liability. Certain factors are
used to ascertain the advance rate, including
where the debtors are located (country), sales
contract terms, payment terms, dilution, how
quickly the receivables are paid and how easily
the customer can prove that the goods or
services have been provided.

Structuring the deal

11
 Figure 3a: Accounts Receivable Borrowing Base
Availability Calculation / Borrowing Base

ACCOUNTS RECEIVABLE CALCULATION Due Diligence

Ledger Ledger1 Ledger2 Ledger3
Units / CY Total GBP GBP USD EUR
Date of AR Ledger: 31/11/2014 31/11/2014 31/11/2014 31/11/2014
Exchange Rates: 1 1.5785 1.2585
Gross AR Balance £18,183,301 £15,247,841 $1,543,275 € 2,463,860
GBP Equivalent £977,685 £1,957,775
Less:
Non-Notified/Excluded Accounts A £67,868 £15,108 $83,281 €0
GBP Equivalent £52,760 £0
Notified Ledger Balance: £18,115,434 B £15,232,733 B $1,459,994 B € 2,463,860
Less Ineligibles:
Past Due (per Ageing) & Cross Age > 50% 7.13% 90 days EOM C £1,297,043 £1,173,998 $70,644 € 98,554
Credit Balances in Past Due £4,123 £3,343 $1,231 €0
Contra Offset to Payables D £176,243 £176,243 $0 €0
Credit Note Issuance Lag and Disputes E £0 £0 $0 €0
Sale or Return Terms & Invoiced Pre-Delivery £0 £0 $0 €0
Direct Receipts £0 £0 $0 €0
Accrued Retros
F £0 £0 $0 €0
Debtor Spread Restriction - % of Notified Ledger G £0 £0 $0 €0
Exotic Debtors (Non-OECD or EEA Territories) & Excess over Credit Insurance Limits H £49,491 £0 $0 € 62,285
Export Restriction £0 £0 $0 €0
Carrier Preferential Creditors I £63,475 £63,475 $0 €0
Non-Invoice Debits/GL & MI, Current Funder variance £0 £0 $0 €0
Excess Dilution (Sales) if fixed AR Advance Rate 3% £0 £0 $0 €0
Other Creditors and Accruals £0 £0 $0 €0
Total Ineligibles £1,590,375 £1,417,059 $71,875 € 160,839
GBP Equivalent £45,534 £127,802
Net Eligible J £16,525,038 £13,815,674 $1,388,119 € 2,303,021
GBP Equivalent £879,391 £1,829,973
Advance Rate K 85% 85% 85% 85%

Availability £14,046,282 £11,743,323 $ 1,179,901 €1,957,568

GBP Equivalent £747,483 £1,555,477
Effective Advance Rate on Notified Ledger 78% 77% 83% 79%

Facility Limit £18,500,000

Availablity £14,046,282
Drawdown as per Capital Structure 31/11/2014 L £9,875,000
Headroom/Excess Availability
M £4,171,282

A Non notified/excluded accounts include all Inter-Company sales, cash or pro-forma sales and sales that are deemed non fundable.

B Eligible AR collateral by currency and/ or company when consolidated into a single Borrowing Base.

Value of any AR that remains unpaid past the eligible funding period. If 50% or more of a receivable is outstanding beyond the eligible
C
funding period the whole balance is reserved.

D Reserve for any potential offset between buyer & seller where they have a reciprocal trading relationship.

E Reserve for all AR that can be returned by a debtor or is in dispute.

F Value of rebates/over riders due to debtors. These amounts are ‘dilutive’ to the ABL’s eligible collateral.

Prime debtor limit set based on assessment of borrower & debtor credit quality combined with sale terms, payment history and location
G
of debtor.

H Value of any Payables outstanding beyond payment terms to carriers who ship/deliver the borrower’s goods to debtors.

I Reserve for all ‘high risk/sanctioned ‘ debtor territories, under or non insured debtors.

J Total value of all Eligible AR Collateral in ‘base currency’ on which the Advance Rate is applied.

K The %age at which the ABL advances funding against the AR based on the overall collateral evaluation.

L The forecast usage of the AR Borrowing Base based on the pro forma capital structure of the transaction (figure 5).

M The difference between the actual Availability generated from the Borrowing Base and the draw down required by the borrower.

Asset-Based Lending
12
Inventory carries a much higher risk profile,
particularly since it changes regularly, so typically
attracts up to 75% of appraised value (which
would be based on the lender’s ‘net orderly
liquidation value’, and which would also include
details of how the assets would be sold). See
Figure 3b for an examples of an inventory
borrowing base.
Fixed asset term loans are not considered
suitable for borrowing bases and as such are
structured as straightforward amortising term
loans. They are always subject to a third party
appraisal which is payable by the borrower. The
debt quantum and the loan amortisation are
linked to both the borrower’s ability to service
and repay debt from free cash flow and the
valuation of the applicable asset.
Plant and equipment is typically offered around
75p in the pound against an ex-situ/appraised
forced-sale valuation whilst property would
attract a similar rate, but would also be subject
to lender valuations based on a 365 day open
market value to take into account a potentially
longer sale process.

“How much a company can borrow is determined by its collateral base”

Figure 3b: Inventory borrowing base

Combined gross value of all Raw Materials, Inventory Borrowing Base (NOLV based Appraisal)
A Work In Progress and Finished Goods held 31/10/2014
by the borrower. £M GBP Per Appraisal Per Underwrite
Gross Inventory at Cost A £5,953,223 £5,953,223
Exclusions for slow moving, obsolete, Less:
returned Inventory, Raw Materials or goods Excluded B £2,000,248 £2,000,248
B
subject to ROT, Packaging , WIP, stored at a Appraised Inventory at Cost Price £3,952,975 £3,952,975
third party location, damaged...
Gross Orderly Liquidatiion Value C £5,533,203 £5,533,203
Inventory value derived from historic sales
C & margin, mix and cost analysis by the Less:
appraiser. Liquidation Expenses D £974,958 £974,958
Net Orderly Liquidation Value £4,558,245 £4,558,245
Appraisers calculation of all costs associated
with liquidating and disposing of all inventory Advance Rate 85% 85% E
D Gross Availability £3,874,508 £3,874,508
in a given period of time via a preferred
method. Usually 120 days.
Less:
The Advance Rate the ABL determines is Specfic Reserves £0 £30,000
appropriate for the types of inventory being Enterprise Act £600,000 £600,000 F
E funded taking into account the appraisers Preferential Creditors £40,000 £40,000
comments, recommendations and the Net Availability £3,234,508 £3,204,508
overall transaction and lending structure Effective Advance Rate on cost 54% 54%

Mandatory statutory reserves the ABL would

F have to pay to Creditors in order to realise its
lending in an insolvent liquidation scenario.

Structuring the deal

13
 The ABL will use the outputs of the collateral ongoing working capital headroom generated
due diligence and appraisals and overlay by the facility.
them onto the borrower’s monthly projected
The example in Figure 4 shows forecast
forecasts. This ‘forecast availability schedule,’
availability driven from an ABL’s own due
which will take into account seasonality
diligence analysis versus the company’s
and expected growth rates, will help lender,
expected borrowing. The difference between
sponsor and borrower assess the levels of
the two is the headroom.

Figure 4: Headroom and Total Availability

£4,000,000 £20,000,000

Total Availability
£3,500,000 £17,500,000
Headroom

£3,000,000 £15,000,000

TOTAL AVAILBILITY
HEADROOM

£2,500,000 £12,500,000

£2,000,000 £10,000,000

£1,500,000 £7,500,000

£1,000,000 £5,000,000

£500,000 £2,500,000

£0 £0
Oct 14

Nov 14

Dec 14

Jan 15

Feb 15

Mar 15

Apr 15

May 15

Jun 15

Jul 15

Aug 15

Sep 15

Oct 15

Nov 15

Dec 15

Cash-flow loans This type of loan is secured but not collateralised

Some ABL providers may extend a cash-flow- against specific assets – as such it tends to
based term loan (sometimes referred to as a be extended over and above the asset-based
‘strip’ or an ‘air ball’) to borrowers with strong borrowings. Such a facility provides the borrower
capital structures and sufficient free cash flow with more liquidity for its working capital revolver,
to service the debt (as measured by the fixed meaning it enhances headroom or potentially
charge coverage ratio). allows the sponsor to inject less of their own
money, thereby enhancing their own returns.

Figure 5: Illustrative all asset ABL capital structure

Fig.5  ABL  Capital  Structure

Statutory  Inventory  
Gross Ineligible Net  Eligible Advance  Rate Reserves Availability Drawdown Headroom Facility  Cap
Accounts  Receivable  (i) £18,183,301 £1,590,375 £16,525,038 85% £14,046,282 £9,875,000 £4,171,282 £18,500,000
Inventory    (i) £5,533,203 £974,958 £4,558,245 85% £670,000 £3,204,508 £1,602,254 £1,602,254 *  see  below
Machinery  &  Equipment  (ii) £2,500,000 £2,500,000 75% £1,875,000 £1,875,000 £0 £2,625,000
Freehold  Property  (iii) £2,000,000 £2,000,000 75% £1,500,000 £1,500,000 £0 £1,800,000
Cash  Flow/Air  Ball/Top  Slice  (iv) £2,000,000 £2,000,000 £2,000,000 £0 £3,600,000
£30,216,504 £25,583,283 £22,625,790 £16,852,254 £5,773,536 £26,525,000
*  Inventory  is  a  £4,000,000  sub  limit  of  the  AR  facility

Monthly  
Term Profile Amortisation Annual  Amortisation Bullet  on  Maturity
i.  Revolving  facility 5  Year Revolving £0 £0 £0
ii.  5  Yr  fully  amortising  term  loan  @£31,250  p/m 5  Year Term £31,250 £375,000 £0
iii.  10  Yr  amortisation  profile  5  yr  term  @  £12500  p/m 5  Year Term £12,500 £150,000 £750,000
iv.  3  Yr  amortisation  profile  @  £55,583  p/m 3  Year term £55,583 £667,000 £0
£99,333 £1,192,000 £750,000

Asset-Based Lending
14
Figure 6: Transaction Sources and Uses
Fig  6.  Transaction  Sources  &  Uses
1. The total of Accounts
SOURCES USES Receivable and Inventory
ABL  Revolver  Availability £17,250,790 Purchase  Price £20,104,111 Availability in the ABL Capital
ABL  Term  Debt  Availability £5,375,000 Working  Capital £1,448,143 Structure (Figure 5, page 14)
Deferred  Consideration £0 All  Fees £900,000
Management  Equity £300,000 Headroom £5,773,536 2. The total of Machinery
Sponsor  Equity £300,000 & Equipment, Freehold
Sponsor  Loan  Notes £5,000,000 Property and Cash Flow/
TOTAL £28,225,790 £28,225,790 Air Ball/Top Slice Availability
in the ABL Capital Structure
£26,525,000  x  100   (Figure 5, page 14)
ABL  Closing  fee  100  bps bps  =  £265,250

Capital structure
Once the borrowing base has been calculated “As each borrower and asset
the ABL will assess whether the size and base is different, reporting
structure of the revolving facility, when
requirements will vary”
combined with any term loan component,
meets what the sponsor/borrower is looking
for in meeting immediate transaction financing
needs, as well as delivering sufficient
working capital.
The example in Figure 6 above builds on the
ABL capital structure in Figure 5 and illustrates
how the ABL facilities fit in to a fully funded
capital structure.

Monitoring and reporting

In addition, because ABL facilities tend to be
revolving, the borrowing base is a dynamic
structure that will fluctuate with the value of the
assets. This is where the company’s finance
team need to work hand-in-glove with the
ABL to ensure an open information flow over
agreed periods.
As each borrower and asset base is different,
reporting requirements will vary. Information
reporting could be required on a monthly
rather than weekly basis, covenants might be
tested less frequently, and there may be fewer
disclosure requirements.
The final part of this process is the ABL sanity
check. Now there is visibility of the business, is
the package what the sponsor requested, does
it provide sufficient headroom for the target’s
working capital requirements and transaction
structure, and can we deliver?
If the answer is still ‘yes’, then the credit paper
will be submitted, approval will be obtained,
a formal offer letter will be issued, and the
process enters its final stages.

Structuring the deal

15
 Final steps
Legal
While the bulk of the preparation is now
complete, how long it takes from here to
completion is largely down to the sponsor/
borrower, and as with all transactions it can
range from several days to many months.
One sure way to ensure a smooth process
is to use legal counsel that has a specialist
banking team familiar with and experienced in
asset-based structures. It is worth noting that
ABL documents are not standardised, although
they are becoming more sensitive to private
equity-specific needs around elements such as
committed facilities.

“Use legal counsel that has a specialist banking team familiar with and
experienced in asset-based structures”

Know your ABL team

As a borrower you will be required to have completed and passed all the lenders
‘Know Your Customer’ compliance requirements, but how well do you know your
lender? These are not people you will deal with only at ‘liquidity’ or ‘credit’ events, but
on an on-going basis. The typical ABL team looks like this:

THE ORIGINATOR
The business development manager will source deals, assess their applicability to
the lending organisation and negotiate all the terms, is responsible for managing the
transaction process, and ultimately ensures the deal can be delivered and is funded.

THE ANALYST
The field audit/due diligence/collateral analyst who will go on-site, inspect facilities
and validate collateral before, during and after completion.

THE UNDERWRITER
Works in close co-operation with the originator in analysing opportunities,
investigating the background of target companies, their people and financials, and
responsible for presenting the credit proposal in a coherent manner that ensures any
risks are mitigated and the basis of the lend is robust.

THE PORTFOLIO MANAGER

The relationship manager who is the day-to-day point of contact for the customer,
responsible for monitoring the business’s situation, protecting the relationship,
supporting the borrower in their evolving needs, through good times and, if necessary,
more challenging times.

Asset-Based Lending
16
The ABL loan document contains much that
is familiar from leveraged loan documents
but are not yet standardised in the way LMA
documents have become. For instance, there
are provisions solely related to the asset base
and information provision and monitoring that
are not found in leveraged loan documents.
Prior to the drawing up of legal documents,
the private equity sponsor may have several
points of negotiation to the Offer Letter
before deciding upon a final ABL provider.
The Financial Director of the target company
may also have opinions about the facility that
could change things. But assuming there are
no real obstacles (and there very rarely are at
this stage), and condition precedents can be
satisfied, we move to the final step.
The ‘Take-on’
This refers to updating collateral reports and
agreeing the final availability figures. The
Relationship Manager of the ABL provider will
then guide the management through the ABL
systems and processes, and provide manuals
and tutorials.
After this point, the transaction process is
finally complete.
Structuring the deal
Syndication
There is an active ABL syndication
market, with cooperation driven by the
ABL providers themselves rather than
capital markets intermediaries. ABL
providers tend to have a good working
relationship, and regularly collaborate to
deliver larger lending facilities.
In addition, there is an active cross-
border syndicated ABL market in
operation with US ABLs investing into
the UK and Continental Europe, as well
as several home grown providers. Some
of the largest European ABL deals have
been the ‘foreign’ components of US
originated deals, with recent examples
of European collateral sub-limits
pushing the US$1 billion mark; although
it should be noted that these have been
for large international corporates with
strong credit ratings.
When considering cross-border
transactions, it is important to know
your lenders, and be comfortable with
their international capabilities. Not all
European jurisdictions are ABL friendly
and in many cases facilities are limited
to receivables financing due to European
banking regulation and the lenders’
subsequent ability to take security.
17
 Conclusion
Asset-based lending can be a powerful working capital assets, ABL has developed
weapon in a private equity sponsor’s into a broader corporate funding product
armoury. Provided the target company has based on the depth of a borrower’s balance
some solid assets (heavily contractual service sheet, whilst it has simultaneously evolved
businesses tend to be less suitable for beyond mainly manufacturing and industrial
instance) it can be a simple, inexpensive and assets to encompassing a far wider range of
flexible form of funding, both for acquisitions underlying assets.
and financing existing portfolio companies
Today ABL is used in complex, international
either for growth or to fund dividend recaps
transactions across a wide range of sectors,
on the back of some solid assets.
from retail through to distribution, logistics,
various forms of manufacturing, equipment
Using the typical ABL structures in Figures 6 and
rental and recruitment. It can constitute the
7, the following illustration shows what the pro-
sole debt piece or can be used as part of
forma capitalisation of a private equity acquisition
a structured finance package that includes
funded by asset-based lending could look like.
mezzanine and other debt components. Its
The relationship with the lender tends to be quite appearance in Unitranche loan structures is
different to that of a leveraged loan provider, and also no longer a rarity. In the US it is a staple
this can be both unsettling for those unfamiliar part of the corporate finance structure on most
with the process, and a great comfort to those sponsored transactions.
sponsors and borrowers that value a true
In the UK asset-based lending has historically
partnership approach, one which will support
played second fiddle to leveraged loans for
the company through its growth phases and
financing private equity transactions. Experience
potential future ownership changes.
from other markets suggests UK-based O&OE
The story of ABL in recent decades has sponsors could take more advantage of this All tables are for illustrative
been one of evolution: with an initial focus on simple and flexible form of finance. purposes only.

“ABL has developed into a broader corporate funding product based on

the depth of a borrower’s balance sheet”

Figure 7: Pro-Forma Capitalisation

Fig  7.  Proforma  Capitalisation

Debt  to  Adj  

Opening  Amount %  of  Total EBITDA Pricing    Base  +  bps Interest Snr  Debt  Fixed  Charges
ABL  AR  &  Inventory £17,250,790 61% 225 Paid £0
ABL  M&E £1,875,000 7% 325 Paid £375,000
ABL  Property £1,500,000 5% 325 Paid £150,000
ABL  Cash  Flow £2,000,000 7% 400 Paid £667,000
TOTAL  ABL  DEBT £22,625,790 80% 4.2  X
£1,192,000
Sponsor  subordinated  loan  notes £5,000,000 18% 1000* Paid/PIK
Deferred  consideration  Loan  note
Total  Other  Debt £5,000,000 18% 0.9  X

Equity £600,000 2% 0.1  X

Total  Consideration £28,225,790 100% 5.3  X

EBITDA  TTM    Sep  14 £5,740,000

Adjusted  EBITDA   £5,360,750
Capex  -­‐  New,  replacement,  maintenance £2,125,000
Annual  Senior  Debt  Fixed  Charges £1,192,000  Snr  debt Loan  Notes   Total
Total  Paid  Interest £800,000 *  Interest  Paid £500,000 £300,000 £800,000
£5360.75-­‐
FCCR  =  EBITDA  -­‐  Non  Financed  CAPEX/Scheduled  Debt   £2125/£1192+800  =  
Repayment+  Paid  Borrowing  Costs  +  Loan  Note  Redemptions 1.62  :  1 *  Interest  PIK 0 £200,000 £200,000
Interest  Cover  =  EBITDA  -­‐  Non  Financed  Capex/  Paid   £5360.75-­‐£2125/800  
Borrowing  Costs =  4.0  :  1

Asset-Based Lending
18
Work with a proven and experienced lender
Private equity firms looking to maximise their borrowing capacity can turn to Wells Fargo Capital Finance for
flexible, innovative financing. We provide comprehensive asset-based lending and technology finance to a wide
spectrum of companies across the U.K.

Comprehensive asset-based financing

As a leader in asset-based financing, we offer tailored funding structures for mid to large corporates facing a variety
of situations, including growth, leveraged buyouts, refinancing, restructuring, early and mid-stage turnarounds,
and mergers and acquisitions.

Technology finance
Public and private enterprise software and technology companies can access senior secured credit facilities
structured on recurring revenues, cash flow, or a combination of both. Companies typically use the facilities to
finance acquisitions and recapitalisations, as well as for working capital and organic growth initiatives.

Success stories

Loch Lomond We served as Joint Lead Arranger on an asset-based credit facility that supported
Spirits distiller the acquisition of Loch Lomond by Exponent Private Equity.

Kurt Geiger We provided a global asset-based financing solution to support the acquisition of
Luxury footwear The Jones Group by Sycamore Partners and the subsequent management buyout
retailer of Kurt Geiger.

Intelliflo We served as Agent and Arranger on a senior facility to support HgCapital’s

Leading provider of investment in this market-leading software company.
front and back office
software to financial
advisors

For more information, contact Wells Fargo Capital Finance today

Steven Chait, Managing Director, EMEA Regional Head
+44 (0)845 641 8888
wellsfargocapitalfinance.co.uk

We are available to take your calls Mondays through Fridays, 9:00 a.m. to 5:00 p.m. GMT, excluding UK bank holidays. Call costs may vary — please check with your telecommunications provider.
Calls may be recorded for security purposes and so that we can monitor the quality of our service.
Wells Fargo Capital Finance is the trade name for certain asset-based lending and senior secured lending services of Wells Fargo Capital Finance (UK) Limited and Wells Fargo Bank, National
Association (WFBNA). Wells Fargo Capital Finance (UK) Limited is a wholly-owned indirect subsidiary of WFBNA, and a private limited company incorporated under the laws of England and Wales
with its head office and registered office at 5th Floor, Bow Bells House, 1 Bread Street, London, EC4M 9BE. Wells Fargo Capital Finance (UK) Limited is registered with the UK’s Companies House
under company number 02656007. WFBNA is a national banking association organised under the laws of the United States with its head office at 420 Montgomery Street, San Francisco, CA 94104,
USA. WFBNA is registered with the U.S. Office of the Comptroller of the Currency. WFBNA is registered with the UK’s Companies House under number FC026633. WFBNA is subject to regulation
by the Financial Conduct Authority in the UK and limited regulation by the Prudential Regulation Authority. Details about WFBNA’s regulation by the Prudential Regulation Authority are available
from WFBNA on request.
© 2015 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. WSC-1237818
About the Sponsors
BNP Paribas
Commercial Finance
BNP Paribas is a leader in ABL
across Europe and beyond.
With operations from Portugal in the
west to Turkey and in the east we
offer an unrivalled capability to fund
asset based deals in 15 European
jurisdictions.
We combine the balance sheet
strength of one of Europe’s leading
banks with the local expertise of ABL
practitioners on the ground to deliver
appropriate ABL funding solutions
to a range of corporate clients. Our
products range from simple single
country debtor funding through
non-recourse solutions to multi-
jurisdictional asset based lines.
Our people have considerable
experience in working alongside
Private Equity in a variety of
transactions both in the UK
and across multiple European
jurisdictions and beyond.
As the ABL arm of one of the best
capitalized banks in the world, we
stand ready to assist the Private
Equity community in creating value
both within existing portfolios and
across new acqusitions.
British Private Equity & Venture Capital Association
5th Floor East, Chancery House, 53-64 Chancery Lane, London WC2A 1QS
T +44 (0)20 7492 0400 bvca@bvca.co.uk www.bvca.co.uk
PNC Business Credit Wells Fargo Capital Finance
At PNC Business Credit, ‘Done Deal’ Wells Fargo Capital Finance provides
is more than a tag line. It defines our comprehensive asset-based lending
business. and technology finance to a wide
spectrum of companies across
PNC Business Credit is one of the
the UK. With offices in London,
leading U.K. Asset-Based lenders
Birmingham, and Manchester, we
to the Private Equity community,
bring a strong and proven track
advisors and companies alike.
record of working with clients
We provide funding solutions for
to develop their businesses. We
mid-market companies that deliver
deliver flexible financing options
detailed understanding and flexibility,
for companies facing a variety of
combined with unparalleled client
situations, including: early and
access to our senior team
mid-stage turnarounds, growth,
Optimum levels of finance for event leveraged buyouts, refinancing,
driven change restructurings, and mergers and
acquisitions.
• Mergers & Acquisitions
• Management Buy Out/Buy In We work with public and private
• Recapitalisation UK-based companies, in addition
• Refinance to US and Canadian businesses,
• Growth and multinational businesses with
• Restructure/Turnaround operations in the UK, Western
Europe, the US, Canada, and
PNC finds value in;
beyond. As part of Wells Fargo &
• Accounts Receivable Company, a leading financial services
• Inventory provider with a long-standing
• Machinery reputation for strength and stability,
• Freehold Property we can offer access to a wide range
• Intellectual Property – Brands of products and services aimed at
helping companies succeed.
PNC Business Credit is part of the
United States based PNC Financial For more information, visit
Services Group Inc, a retail banking www.wellsfargocapitalfinance.co.uk
and financial services group. With
assets in excess of $300bn, deposits
of over $200bn, a Tier 1 core capital
ratio of 10% and in excess of 38,000
customers and 57,000 employees,
which makes PNC one of the largest
banking institutions in the US.
Contact
T: +44 (0) 1444 475820
E: DoneDeal@
pncbusinesscredit.co.uk
W: AssetBasedLendingUK.co.uk