Chris Hawes, Venture Structured Finance MD, reveals the benefits of ABL in the post-deal phase

Chris Hawes, Venture Structured Finance MD, reveals the benefits of ABL in the post-deal phase.

Financial uncertainty and the potential loss of liquidity in the debt markets are driving an appetite for asset-based lending (ABL) to facilitate acquisitions. But it’s the benefits to be had in the post-deal phase that will ensure its longevity.

Today’s credit sensitive climate may well see traditional lenders tighten funding lines. As a result increasing numbers of corporate finance advisers are looking towards the more flexible independent asset-based financiers for alternative funding.

By taking a more individual approach to assessing a business’ eligibility for funding, greater opportunities can be explored than with traditional bank-led finance. The expected move away from the historical use of senior debt, with its incumbent strict covenants and amortising terms, will see greater appreciation of not only the pre-deal flexibility ABL can offer, but also the equally important long-term benefits to be reaped at the post-deal phase.

Sometimes a debt structure designed to make an acquisition may not be ideal as a working capital solution after the deal closes. Once the initial adrenaline rush of the deal has passed, the cold light of day often reveals that little extra money is available for consolidation and growth.

Today dealmakers can structure a package so the ABL portion of the deal supports the post-deal phase as well as the initial acquisition – providing seamless working capital.

Because debt raised from assets relates to their value, a lot of the funding is done on a revolving basis, particularly receivables and inventory, rather than on a reducing or amortising term basis. In this situation, the facility can flex post-deal as sales grow to increase availability in the receivables line. The inventory funding allows management to make bulk opportunistic purchases, which fuels the growth in sales. As a result, the new management has access to cash that was previously off limits.

Many private equity firms increasingly support the use of ABL 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 dependent on individual cases, stronger deals tend to be more covenant light and therefore less onerous than a senior debt-based acquisition.

This financial flexibility is especially relevant if a business needs to implement operational changes after a deal, which is common when a private equity firm is involved. An element of ABL within the deal structure can give managers the necessary headroom to make these adjustments in the future.

Wherever the credit crunch takes us in 2008 and beyond, what is certain is that organisations are less likely to turn back to senior debt-heavy funding to finance their acquisitions. It’s much more likely that they will continue to explore the arena of ABL – or a blend of the two – with its greater flexibility both pre- and post-deal.

Fast facts – Venture Finance

• Venture Structured Finance is a division of Venture Finance, providing ABL facilities from £3-£50 million for businesses with a turnover of up to £200 million.

• In addition to maximising working capital headroom, a financial package from Venture Structured Finance helps companies to achieve a number of goals. These can be expansion via a financing package that grows with the business, undertaking corporate finance activity with MBOs, MBIs, M&A, or restructuring supported by flexible funding.

• Core services offered by the company include invoice combined with revolving inventory finance, plant and machinery loans, property loans or even funding against intellectual property. Leveraged loans based on the future cash generation of the business are also available.

• For more information, visit www.venture-finance.co.uk