The £447 million management buy-out of wholesaler and distributor Palmer & Harvey Group in April is the latest example of how larger businesses are turning to alternative methods of finance, such as asset-based lending (ABL) to fund their ambitious growth plans.
The MBO of the £4 billion-turnover distribution business was jointly backed by Barclays Commercial Bank and Bank of Ireland subsidiary Burdale, with a finance package including a chunky £280 million receivables finance facility and £50 million of senior debt. Barclays also provided a £117 million loan note guarantee facility as part of the deal.
According to figures from the Asset Based Finance Association (ABFA), the number of syndicated deals led by the trade organisation’s members in the final quarter of 2007 jumped 13.7 per cent on the previous year, from 51 to 58 transactions. More than £1.2 billion was advanced to businesses via syndicated deals, a massive 37per cent rise.
Kate Sharp, ABFA chief executive, believes the value of syndicated deals (£50 million plus) could soar as liquidity continues to cause problems and businesses become more comfortable with ABL within structured finance deals. “Traditionally, when other forms of cash tighten, people turn to the ABL market as it has an excellent reputation for not losing money.”
Historically receivables finance has been the most popular asset-based finance option. However, as the industry has developed, financiers have gone beyond the value of outstanding invoices, and added property, plant and machinery, and inventory to their packages. “Asset-based lenders manage their risk by tracking asset values rather than financial performance. Therefore when we go into a deal, even if the company fails we don’t tend to lose money and that’s why people see ABL as a safe pair of hands,” says Sharp.
Sharp believes that asset-based lenders stand to benefit as other forms of financing dry up. In addition, larger companies, such as Palmer & Harvey, are boosting the size of ABL deals being written as they look to lenders to provide the means to grow their businesses.
The high profile £385 million Woolworths deal, jointly backed by Burdale and GMAC Commercial Finance, was one of the largest asset-backed deals in European retail and suggests that the first
£1 billion ABL deal is on the horizon. However, Sharp has her feet on the ground when she talks about a possible nine-figure deal. “We did a count among all our members and added up the amount of money that they would be prepared to do in terms of exposure and got to £1 billion, but that’s probably a way off yet.”
The smaller end
The first three months of 2008 saw a number of smaller ABL offerings in the form of GE Commercial Finance’s £16 million asset-backed loan to Total Polyfilm. The structured finance package included revolving receivables and inventory facilities and a plant and machinery term loan that will drive the polythene producer’s development plans.
In February KBC Business Capital refinanced Burn Stewart Distilleries for £31 million. The facility was tied to the value of the Scotch whiskey producer’s assets, including brands, inventories and distilleries. Deals to date show that the asset-based finance industry is on track to surpass the £192 billion raised last year, up £173 billion on 2006 and Sharp is keen to see more growth.
“I think members would like to see ABL deals doubled. When lending tightens up in other places people look to move into a safe pair of hands as happened in the late eighties and early nineties when invoice finance grew quite dramatically and we are hoping for a similar experience. I think ABLs are looking for 20-30 per cent growth. That’s quite ambitious, but that’s what we would like to see.”