£1 billion ABL deal so close

The first £1 billion asset-based financed deal is just a matter of time, writes M&A's Andrew MacLeod.

Receivables finance has come of age in Britain, and the M&A community awaits the first £1 billion deal with bated breath.

For a number of years transactions of that size have been a reality in the US, where the market is relatively mature.

And even on this side of the pond, M&A funded through receivables, plant and other assets has been growing in size for most of this decade – pushing past the £350 million mark. This has done much to concentrate the attention of the larger players in the asset-based finance sector, 16 of whose leading members recently let it be known that each would be willing to shoulder a share of a £1 billion ‘milestone’ deal, should one happen along.

“It’s eagerly awaited,” says Kate Sharp, chief executive of the Asset Based Finance Association (ABFA), the trade group that speaks for the sector.

Of course any sum that involves nine noughts will inevitably capture the headlines, but Sharp points out that receivables finance in all its forms – from invoice discounting and factoring through to asset-based lending – can be tailored to suit so-called ‘mom and pop’ outfits seeking cash to grow, right up to corporate giants hitting the takeover trail.

“It’s flexible and almost instant,” she says. “The amount of cash available grows with the business, increasing as things go well, and reducing if things don’t go to plan.

“The more invoices you submit, the more finance is provided – and it can be available literally within a couple of hours. It’s not like a fixed loan on agreed terms, which can leave a firm seriously over-financed if there is a downturn.”

Receivables work as a ‘tracker’ loan, which follows the firm’s real-time fortunes rather than some notional projection of future business, and this is what makes it an invaluable management tool, says Sharp.

“Because of the way it works it has checks and balances built in,” she says. “People get the impression that it’s far more complicated than it is, and for small firms in particular it’s a really good way of releasing cash. Receivables Finance could get them twice as much as they could obtain from a loan or an overdraft.”

ABL takes off

ABF’s value in deal-making was illustrated in May last year when RBS Invoice Finance and Royal Bank of Scotland put together an integrated debt package to finance the MBO of All Metal Services (AMS), one of the UK’s leading distributors of aircraft grade aluminium.

The funding arrangements included an asset-based lending element along with senior term facilities, and the outcome delighted AMS, which praised the innovative and competitive nature of the package that also had the flexibility to meet the firm’s future needs.

As well as being managing director of Lloyds TSB Commercial Finance, Ted Ettershank is chairman of the ABFA, which gives him a thorough insight into the sector in the UK.

He has seen it grow from a business, which was limited to providing finance against invoices to the position where it can – and does – fund multi-million pound cross-border deals. Today’s players have links to the rest of Europe, and beyond.

“Things have moved on considerably,” says Ettershank, observing that the modern approach is to take a broader approach, embracing inventory, equity and other fixed plant and machinery, property and other assets along with unsettled debts.

“That gives people engaged in an MBO, and looking to see how much equity they need, valuable headroom. If they have an asset-based lending facility of £10 million, for example, and their working capital requirement is only £6 million, it gives them breathing space and flexibility.

“That extra money can be drawn down immediately if the business requires it.”

Ettershank adds: “What asset-based lenders bring to the market is a good understanding of the cash-flow dynamics of a business going forward as well as the ability to manage the assets, which act as their security.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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Asset-based lending