The current credit climate has ensured that organisations are increasingly less likely to turn back to senior debt-heavy funding to finance transactions

The current credit climate has ensured that organisations are increasingly less likely to turn back to senior debt-heavy funding to finance transactions, writes Steve Websdale of Venture Structured Finance

Almost all companies will try to conserve their cash during the downturn, rather than spending on acquisitions. Concerns over refinancing rates, which have become increasingly expensive, have also caused companies to be much more cautious about mergers and acqusitions.

However, some of the deals being put in the deep freeze could be thawed by exploring the viability of Asset-Based Lending (ABL), with its greater flexibility pre- and post-deal.

The ABL industry is well suited to deal with the current uncertain economic outlook because it understands the nature of assets and collateral. ABL financiers can work in a nimble and flexible manner, which many traditional financial institutions are often unable to do. The large corporate finance advisers are now waking up to this fact and are increasingly becoming advocates of using ABL as part of the funding mix.

The good news is that many M&A deals are being struck at bargain prices. We have witnessed more new enquiries about our ABL services during the last year than ever before, due to the tightening of the major banks’ lending criteria. A greater number of businesses are clearly turning to responsible and responsive funding options, such as ABL, to fund deals.

ABL is also being used by a growing number of management teams seeking finance for an MBO. ABL’s flexibility is suited to MBO funding requirements. It allows a management team to leverage assets, be they receivables, stock, plant and machinery or property, from within its business to unlock capital to so enable the purchase.

Although it is likely that the number of acquisitions and MBOs is likely to slow down in 2009 as businesses look to retain their liquidity. Transactions that are completed will be more likely to include an element of invoice and ABL in the funding structure as it may be one of the few funding options available that will allow deal completion due to its ability to leverage secured funds. For this reason, I expect to see increasing use of invoice and ABL in acquisitions in 2009 as this trend develops.

Private equity and venture capitalist houses are also awakening to the benefits of working with ABLs for larger structured deals and increasing numbers support the use of this form of finance because it reduces the concern that a series of covenants will be tripped at various stages in the business’ life cycle.

Although the covenant structure is naturally dependent on the specifics of individual cases, stronger deals tend to be more covenant-lite and therefore less onerous than a senior debt-based acquisition.

Today’s dealmakers can also structure an MBO package so that the ABL portion of the deal supports the post-deal phase as well as the initial acquisition – providing seamless working capital.

Cash is king in these difficult times and flexibility is especially relevant if a business needs to implement unforeseen operational changes after a deal. An element of ABL within the deal structure can provide managers with the headroom to make any necessary adjustments quickly.

The more the banks tighten credit criteria, the more businesses will turn to alternative methods of funding. What the banks might find tough is that once a business has experienced the funding levels and service that an experienced ABL can provide, many will be converted forever.