As liquidity vanishes and larger deals are put on hold, asset-based lenders are providing crucial turnaround finance for troubled businesses

As liquidity vanishes and larger deals are put on hold, asset-based lenders are providing crucial turnaround finance for troubled businesses

With a growing interest in turnaround finance, a lack of liquidity is forcing businesses to turn away from traditional forms of finance, such as debt towards more robust and responsive funding, such as asset-based lending (ABL).

Venture Finance MD Peter Ewen adds that less liquidity in the markets has also caused many ABLs to revert to a more cautious stance when it comes to how much they are willing to lend and the assets that they are prepared to use as collateral. Venture Finance and its specialist ABL division,

Venture Structured Finance, focuses on funding lines of up to £15 million and “is very much open for business and a solid partner in turbulent times,” he says.

The parent company, nationalised Dutch bank ABN Amro is liquid and doesn’t plan to reduce lending anytime soon. Nevertheless, he states that liquidity, or the lack of it, will be a major issue for many ABL players this year and that the times when several lenders frenetically chased the same transaction have come to an abrupt end.

The affable MD says, “We [ABLs] are going back to basics and are focusing on leveraging more conventional assets, such as receivables – which accesses the value of unpaid invoices – as well as stock, plant, property and machinery.

“Lenders will be looking for strong cash flows and less leverage in the business than has been the case recently,” he adds, suggesting that ABLs must take the time to “truly understand” the business.

With cash flows coming under pressure and the number of business failures rising by 78 per cent in January, according to information group Experian, Ewen suggests that this won’t be easy.

“Forecasting cash flows is challenging as situations are changing so rapidly and businesses are prone to failure – you’ve got to pick the right horse.”

The number of ABL-funded buy-ins and buy-outs is dwindling, says Ewen, as lenders are unwilling to take that gamble, while management teams are biding their time and putting expansion plans on hold – an observation that is being echoed by other major lenders .

“I can’t see M&A activity picking up anytime soon. The downturn was so rapid; we can only hope the upturn will be equally as fast. However, I suspect recovery won’t happen this year.”

Financial evolution
Ewen, who has been with Venture Finance almost since its launch two decades ago, has seen the company transform from a receivables (invoice) business to a major player in the ABL market, funding mid-market transactions that encompass all manner of assets.

“ABL has changed dramatically since I began here as a credit manager in 1990. Venture was established to provide receivables finance and subsequently moved into ABL.”

The company now provides asset-based finance for business start-ups and companies with turnovers of up to £150 million. It was one of the first financiers in the UK to write an ABL deal.

“In 1990, we secured our first ABL deal on stock. It was very modest, with a funding line of £300,000 for a distributor of computer peripherals, but it opened our eyes to the possibilities going forward as we could already see the growth of the ABL market in the US.”

Those close to the deals say that the UK is playing ABL catch-up with the US, where unconventional assets, such as intellectual property rights are regularly used as collateral. Ewen is unconvinced that this type of lending is likely to appear anytime soon in the UK and predicts that funding from these types of assets are likely to be reined in across the Atlantic.

“I think they [US lenders] will become less aggressive in their structures because of the financial crisis.”

Raising awareness
The industry has come a long way in the last twenty years, according to Ewen. He recalls the “struggle” to get accountants to recommend ABL services to their clients. “We are now well known by the big four accountancy firms and we are even doing deals with private equity.”

Last year, Venture conducted a survey that questioned accountants on the rate of “attractiveness” of various business finance options among their clients, compared with the previous year.

The findings revealed that ABL is an “attractive” option to more than half (52 per cent) of their business clients compared with only two per cent in the previous year. The findings also showed that interest in invoice finance had also grown over the same period from three per cent to 29 per cent.

Ewen confirms an uplift in enquiries from deal introducers in the last quarter. And as awareness has risen, so has the number of assets that are used to secure funding. Ewen adds: “It has been fashionable to lend against mezzanine loans for the last couple of years, but I think this will be less common in the immediate future.”

Recovery position
Struggling firms across the country are increasingly using ABL as a means of raising funds during the credit crunch, according to research by the Asset Based Finance Association (ABFA).

Kate Sharp, chief executive of ABFA, says: “In the next 12 months, we are going to see many more businesses looking for turnaround deals due to underperformance and this is where ABL is perfectly placed to help.”

Ewen predicts that “2009 will be the year of the turnaround and will be all about seeing the client through to the other side – growing the relationship with them.

“Businesses need steadfast commitment combined with sufficient liquidity to execute restructuring for continued survival.

“ABL will be instrumental in delivering financial stability at a time when a steady stream of working capital can make the difference between whether a company will sink or swim,” he says.

“It will be more vital than ever for business financiers and specialist advisers to form resolute relationships to support UK businesses and enable them to emerge from these turbulent times in a position of strength.”