Vol 1 (2004) - Issue 3

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Global Cross-Border Corporate Restructuring: Is Asset-Based Lending the Financing Solution?

Asset-based lending (ABL), finance secured directly against the value of the company’s current and fixed assets, has become the financing method of choice in many US and UK corporate restructurings. This article will explore the concept of ABL as a restructuring tool and discuss its development as a cross-border solution and the impediments to its global use.
ABL grew to prominence initially in the United States, enabling companies to borrow a percentage of the value of both current and fixed assets in return for security over the same assets. From small beginnings in receivables finance, this form of lending has grown to become an industry in its own right, with USD 41 billion of ABL transactions larger than USD 100 million arranged in 2003. Major corporations have seen the value in borrowing secured directly against current assets as a revolving loan and fixed assets as an amortizing term loan; in late 2003 Bank of America completed a USD 600 million revolving working capital facility for Levi Strauss. There are of course limitations: assets need to be tangible and have a clearly attributable value. This results in a focus on components of the manufacturing, distribution and service sectors where margins are low and consequently asset values are higher than a conservative multiple of cash flow. The advantages of ABL, for those who can, is stability and flexibility. Stability comes from the stable value of assets compared to cash flow. Flexibility comes from the structure of revolving borrowings mirroring the working capital cycle and resulting in no need for amortization, as well as an asset focus reducing the lender’s tight reliance on financial covenants.
ABL can be used to finance many different event scenarios: acquisitions, organic growth and changes of ownership, to name just a few. One area where ABL has become particularly prevalent is in corporate restructuring. It is precisely the stability and flexibility that attracts borrowers. When cash flow is uncertain or indeed non-existent, the company can look to its assets to secure funding for the way forward and at the same time gain increased flexibility, enabling the implementation of a restructuring strategy. Furthermore its appropriateness for ‘debtor in procession’ financing has cemented its position in US restructurings.
The growth of ABL in the US has prompted its expansion overseas. The UK was a natural target, given cultural and language similarities and a favourable security and enforcement regime. In the mid 1990s, three US asset-based lenders set up operations: G.E. Capital, Congress and Bank of America. While approaches might have differed, the fact remained that ABL was establishing itself in the UK market, and as its presence grew a small number of European institutions also joined in. UK companies have welcomed the opportunity to have one lender when previously they would rely on a combination of factoring, trade finance, lease finance and mortgages to try to achieve the same result with all the inherent problems of multi-banking. As a result the UK market has grown, with transaction sizes increasing as the concept and methodology becomes more mainstream.
A UK/US transaction remit has led to a number of cross-border transactions, but this cannot be described as global. In fact it was not until the last few years that forward-thinking institutions began to look at opportunities across Europe and beyond. This global drive was partly the result of a need from cross-border restructurings.
Restructuring will mean a lot of different things to different people and this is as much definitional as cultural. In the US the process of Chapter 11 focuses on the re-organization and rehabilitation of the debtor, whereas elsewhere in the world restructuring will often avoid formal procedures at all costs, as their focus is purely on the realization of assets. It is this difference that makes cross-border restructuring so difficult and presents a particular challenge to an asset-based lender, as the legal rights of a lender or debtor will vary so widely.
Cross-border restructuring is an everyday reality, as companies are no longer limited by natural borders. In the last few years, restructuring professionals have been increasingly involved in providing global restructuring solutions and with this comes a need for global financings. Given the process of change and the often considerable costs in achieving it, global ABL facilities, with their inherent flexibility and stability, have been very much in demand.