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In association with
GUIDE TO
Asset-Based Lending
BVCA Guides
DONE DEALDONE DEAL
£40,000,000Asset Based Lending
Chilled Savoury Food
A Portfolio Companyof Vision Capital
DONE DEAL
£Multi-MillionAsset Based Lending
Whisky Distillers
A portfolio Company of Exponent Private Equity
DONE DEAL
£40,000,000Asset Based Lending
Auto Parts
DONE DEAL
£8,400,000Asset Based Lending
Promotional Merchandise
DONE DEAL
£15,000,000Asset Based Lending
Vehicle Testing
DONE DEAL
£9,000,000Asset Based Lending
Fashion Accessories
‘Done Deal’ defines
300 current deals for 100 PE groups across UK and North America
Do you have a deal that needs to get done?Birmingham | Cambridge | Haywards Heath | Leeds | London | Manchester | Southampton 01444 475820 [email protected] AssetBasedLendingUK.co.uk
PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). PNC Business Credit is the asset-based lending arm of PNC Bank, National Association, a wholly-ownedsubsidiary of PNC and Member FDIC. Lending products and services require credit approval. GEN-3424 ©2010 The PNC Financial Services Group, Inc. All rights reserved. Member FDIC
A portfolio company of Endless LLP & Phoenix Private Equity
A Portfolio company of Maven Capital Partners
A Portfolio company of Rutland LLP
A Portfolio company of Synova Capital LLP
BVCA ABL Guide ad A4_Layout 1 02/02/2015 13:09 Page 1
3
Contents
Foreword 5
Introduction 6
How does ABL differ from leveraged loans? 7
What to expect – the ABL process 9
Structuring the deal 11
Final steps 16
Conclusion 18
DONE DEALDONE DEAL
£40,000,000Asset Based Lending
Chilled Savoury Food
A Portfolio Companyof Vision Capital
DONE DEAL
£Multi-MillionAsset Based Lending
Whisky Distillers
A portfolio Company of Exponent Private Equity
DONE DEAL
£40,000,000Asset Based Lending
Auto Parts
DONE DEAL
£8,400,000Asset Based Lending
Promotional Merchandise
DONE DEAL
£15,000,000Asset Based Lending
Vehicle Testing
DONE DEAL
£9,000,000Asset Based Lending
Fashion Accessories
‘Done Deal’ defines
300 current deals for 100 PE groups across UK and North America
Do you have a deal that needs to get done?Birmingham | Cambridge | Haywards Heath | Leeds | London | Manchester | Southampton 01444 475820 [email protected] AssetBasedLendingUK.co.uk
PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). PNC Business Credit is the asset-based lending arm of PNC Bank, National Association, a wholly-ownedsubsidiary of PNC and Member FDIC. Lending products and services require credit approval. GEN-3424 ©2010 The PNC Financial Services Group, Inc. All rights reserved. Member FDIC
A portfolio company of Endless LLP & Phoenix Private Equity
A Portfolio company of Maven Capital Partners
A Portfolio company of Rutland LLP
A Portfolio company of Synova Capital LLP
BVCA ABL Guide ad A4_Layout 1 02/02/2015 13:09 Page 1
BNP Paribas Commercial Finance partners with the Private Equity and Venture Capital communities in the UK and across Europe in the mid-corporate market by delivering working capital solutions in domestic and international markets.
At BNP Paribas Commercial Finance we take the time to understand a business, and then deliver a � exible, solution-driven nance package that taps into our local funding capabilities across Europe.
Call us on - 0845 693 1433 and nd out what exible nance solutions can help meet your - and your clients’ - business objectives.
BNP Paribas Commercial Finance Ltd is a member of the Asset Based Finance Association (“ABFA”) and as such we are bound by the ABFA Code for Members. For more information about the Code please visit www.abfa.org.uk/standards/overview.pdf http://commercial nance.bnpparibas.co.uk
Flexible Cross Border Solution Driven Finance
5Foreword
Foreword
Asset-based lending (ABL), much like private equity, has over the last decade experienced a significant transition from niche sector to the mainstream, providing a genuine alternative to more traditional forms of finance.
Indeed, in December 2014 the Asset Based Finance Association reported that asset-based finance (which includes both ABL and invoice finance) represents a considerable 15.7% of the UK’s GDP. Key to this growth was the recession – as the traditional investment banks withdrew from the market, more and more businesses turned to asset-based lending as a way of raising finance. According to PwC, there was a 33% increase in the level of assets financed between 2006 and 2012.
Post-recession, appetite continues to be strong, not least of all amongst private equity sponsors where it is an increasingly common feature in funding packages. This guide provides an introduction to asset-based lending, outlining the concept and how it differs from leveraged loans, and then walking through the ABL process, from issuing the Information Memorandum to deal structuring and transaction completion.
The BVCA Guide to Asset-Based Lending is part of our series of guides designed to provide an overview of new markets and strategies for the private equity and venture capital community. Produced in association with BNP Paribas Commercial Finance, PNC Business Credit and Wells Fargo, we hope you find it both useful and informative.
Tim Hames Director General BVCA
BNP Paribas Commercial Finance partners with the Private Equity and Venture Capital communities in the UK and across Europe in the mid-corporate market by delivering working capital solutions in domestic and international markets.
At BNP Paribas Commercial Finance we take the time to understand a business, and then deliver a � exible, solution-driven nance package that taps into our local funding capabilities across Europe.
Call us on - 0845 693 1433 and nd out what exible nance solutions can help meet your - and your clients’ - business objectives.
BNP Paribas Commercial Finance Ltd is a member of the Asset Based Finance Association (“ABFA”) and as such we are bound by the ABFA Code for Members. For more information about the Code please visit www.abfa.org.uk/standards/overview.pdf http://commercial nance.bnpparibas.co.uk
Flexible Cross Border Solution Driven Finance
6Asset-Based Lending
Introduction
Borrowing against a company’s assets can be a simple and inexpensive way of funding acquisitions, recapitalisations and working capital requirements.
The borrowing process differs from leveraged loans, since the lender is particularly interested in the nature and value of a company’s assets rather than simply its quality of earnings. Because the value of some such assets changes regularly, asset-based lenders require a greater degree (and frequency) of disclosure from the borrower than might be the case with a leveraged loan.
This has advantages for all parties since it engenders a close and open partnership between borrower, lender and sponsor, where surprises are rare and challenges are revealed quickly and dealt with early-on. Consequently in situations where a borrower needs additional support, the lender can normally move very quickly given their high level of insight and engagement with the borrower.
In this way asset-based lenders are very interested creditors, in a similar way that private equity sponsors are very interested owners.
Asset-based lending (ABL) can work for a variety of businesses across a wide range of sectors, and is an increasingly common component within structured finance packages and cross-border transactions.
This is a guide to how the asset-based lending process works.
Peter Jones Director Sales & Marketing UK BNP Paribas Commercial Finance
Graham Barber Business Development & Marketing Director PNC Business Credit
Steven Chait Managing Director, EMEA Regional Head Wells Fargo Capital Finance
7
How does ABL differ from leveraged loans?
For the borrowing company the main difference between ABL and leveraged loans is the flexibility of the borrowing facilities.
Rather than fixed term loans that are fully drawn and amortize over time, much asset-based borrowing tends to be provided on a revolving basis, more like an overdraft facility than a term loan.
Since the size of that facility depends on the (fluctuating) value of a company’s assets, the lender needs to know what is going-on in real-time. This leads to the second difference to
leveraged lending: the relationship between borrower and lender is a close one, with a high degree of engagement and transparency.
Another big difference is that ABL does not come with a myriad of financial covenants – it is not uncommon for there to be just one. Where ABL is structured solely around working capital assets (i.e. those focused on receivables and inventory) the facility would typically carry a simple ‘interest-cover’ financial covenant, measured as total interest costs-to-EBITDA. For a more structured facility encompassing revolving and term debt the financial covenant
How does ABL differ from leveraged loans?
“ The relationship between borrower and lender is a close one”
Steven Chait Managing Director, EMEA Regional Head Wells Fargo Capital Finance
8Asset-Based Lending
would typically be in the form of a ‘fixed charge coverage’ (to ensure the borrower can service the debt repayment from its cash-flows.)
ABL structures do carry operational controls, typically triggering a ‘conversation’ rather than an event of default. That conversation and consequent auditing may lead to a reduction in the receivable or inventory advanced rates or an increase in the facility reserves, but it would typically not trigger a wind up of the arrangement or transfer to the lender’s work-out team.
This leads to another significant difference between asset-based lenders and leveraged lenders: specialist ABL providers have no work-out teams. Once you have a relationship manager on your ABL facility, that is the person you will have throughout the life cycle of the relationship.
For the company and private equity sponsor, it may also be pertinent to note that ABL is normally significantly less expensive than leveraged loans. This is because banks are required to calculate their regulatory capital (under the various Basel Accords) based on the probability of a company defaulting, as well as by how much of the borrowing could be recouped by the lender in the event of such a default. The collateralised nature of asset-based lending means ABL’s should suffer a lower level of capital loss following a borrower default when compared to a leveraged loan, consequently lowering the cost of borrowing for its customers.
Figure 1. below serves to graphically highlight some of the key structural differences between a typical asset-based lending loan structure and that of a leveraged loan.
Figure 1: Leveraged loans vs ABL
Leveraged ABL
Basis of lend EBITDA multiple Asset value
Security Yes/No Always
Nature of facilities Amortising and bullet Revolving with amortisation on any fixed asset components
Limit flexibility Hard limit Review limit – a function of asset values
Covenants Multiple Financial One financial with applicable collateral performance covenants
Hold levels £m 25 - 30 30 – 60
Secondary market Yes Rarely traded after primary syndication
Ongoing financial information Limited Regular
Equity cheque From 20% From 10%
International Yes Yes but more difficult and usually restricted to receivables
Number of Funders Many Fewer, owing to larger hold levels
Track record Mature Growing
Availability Fixed at commencement Variable – Dictated by asset-base but capped by facility limit
Distributions Limited Permissible subject to tests
Typical pricing
Margin c. 450bps c. 175bps – 300bps
Upfront c. 400bps upfront c. 75-150bps
Facility pre-payment fee No Yes
Collateral Monitoring Fee No Yes
*This comparison is illustrative and could vary from lender to lender and individual credit policies and lending criteria.
9
What to expect – the ABL process An important difference is the ABL ‘transaction’ process. It is no more complex or time-consuming than leveraged lending, but it is different. The ABL provider needs to know things (mainly about the assets) that are not a standard component of your typical Information Memorandum documentation, and knowing what to look out for should keep things on track
Information Memorandum Like any other debt provider, an asset-based lender will conduct an initial analysis based on the provided Information Memorandum (IM). ABLs care about the company’s position, sector, and key customers and so on. But in
addition, an IM that contains some substantive information on the company’s assets will be of great use and ultimately enhance the efficacy of the lending process. Figure 2 is an ABL wish-list that would enhance the typical IM.
Based on the IM and its own research, an ABL provider will assess the deal and ponder several questions. Are the assets financeable? Does the lending meet our criteria? Can we deliver the required package in the required time frame?
If the answer to all these questions is ‘yes’, then the ABL provider, borrower/sponsor will meet to ensure there is agreement on all the parameters, and if not, how any shortfalls can be plugged.
What to expect – the ABL process
General
Location of assets
Sector characteristics
Management experience and credentials
Ownership structure – current and proposed
Strength of company’s market position
Financial
Balance sheet – size and depth of asset base
Net worth – equity / retained profits
Historical and Forecast Capital Expenditure spending
Other trends (e.g. revenue performance, margin performance, overhead performance)
Assets
Receivables – sector and location of debtors, standard terms of sale, ageing of ledger, dilution to the ledger – credit notes, presence of rebates
Inventory – split of finished goods / work in progress / raw materials / location
Plant & Machinery – type, unencumbered or funded, location, age, depreciation profile
Real Estate – location, freehold/leasehold, age, size, factory vs office space
Intangibles – does a brand have value?
Figure 2: Information Memorandum tick-sheet
10Asset-Based Lending
Meeting the managementDependent upon the type of transaction and the level of access to the target company, the ABL provider will commonly request a meeting with the management team and ideally visit the company’s main site of operations. ABL providers will take a keen interest in the company’s physical assets, operating conditions and people during this process.
From here most ABLs will begin a gradual process of information gathering and evaluation aimed at making sure that the management team are aware of the operating and information requirements of an asset-based lend.
The final stage of this initial diligence will be to gain access to more detailed business information and up-to-date financial information, commonly through a data-room. The information will include elements such as: management accounts, debtors and creditors age listings, inventory ageing, forecasts and applicable asset valuations.
Pre-investment proposal/approvalABL providers are fiercely protective of their reputation for delivering – and with good reason. Without the comfort of proprietary deal flow (for those ABLs that are not captive bank entities) they are only as good as their last deal in a competitive market. So the next stage is taken very seriously: the pre-investment proposal, which outlines the deal and is used to build internal buy-in to ensure the ABL will, subject to terms, be able to deliver. Following this, indicative term sheets can be issued and a timeline for completion of the deal can be agreed in principle.
Due diligenceNow the real work begins for the ABL provider and its advisers. It starts with on-site due diligence (sometimes called the ‘field exam’ or ‘survey’) of accounts receivables, followed by evaluations of other relevant ‘financeable’ assets, such as inventory, and property, machinery and equipment, as well as any relevant further financial and commercial diligence.
Parts of this will be done internally by ABLs, but where a third-party is likely to be used, and if a private equity sponsor is speaking to several potential lenders, it is common for the competing ABL parties to agree to a specific third-party to conduct certain parts of the examination on all their behalves, subject to the sponsor/borrower underwriting the cost.
How long this diligence takes depends on the scale and complexity of the business and on how dispersed its assets are, but expect between two to three days for a simple, single site business with accounts receivable-only facility, and up to two to three weeks for complex, international operations requiring multiple asset third-party evaluations and appraisals.
Financial forecastingWhile the field exams are taking place, the ABL will be working assiduously to get comfortable with the company’s financial forecasting models. These will comprise an integrated P&L, cash-flow statement and, importantly for ABL, a balance sheet model that includes meaningful detail on working capital and a pro-forma opening balance sheet tracking out monthly, for example, two years, and then annually for a further three to five years.
The granular trading information on sales, customers, contracts and terms analysed during the field exam are now used by the ABL to validate the sales and margin forecasts as well as calculating the working capital borrowing base.
Forecasts should be compiled on the same basis as audited accounts or at least somehow reconciled to them, so that historic audited accounts, current and forecast management information tally, to ensure a like-for-like comparison.
“ ABL providers are fiercely protective of their reputation for delivering – and with good reason”
11Structuring the deal
Structuring the deal Calculating the borrowing baseHow much a company can borrow is determined by its collateral base – i.e. its fundable assets – with debt secured through the ABL’s priority fixed and floating charge on those assets. The size of the facility is not necessarily affected by under-performance of trading or cash-flow.
To calculate the borrowing base for a transaction the ABL will evaluate the relevant assets (during due diligence), and deduct any ineligibles and specific costs associated with reclaiming collateral to ascertain ‘eligible assets’, to which they will apply an advance rate.
Eligible accounts receivable will typically attract advance rates of up to 90% since it constitutes debt that is independently supported and a statutory contractual liability. Certain factors are used to ascertain the advance rate, including where the debtors are located (country), sales contract terms, payment terms, dilution, how quickly the receivables are paid and how easily the customer can prove that the goods or services have been provided.
Jargon buster
ADVANCE RATE: The ratio between the amount an ABL is willing to lend against a particular eligible asset, and the total value of that asset as determined during due diligence.
DILUTION: The aggregate value of the shortfall between the amount invoiced by a borrowing company and the amount actually paid by that company’s debtors. Typical dilutions are credit notes, settlement discounts and any debit note adjustments. As an industry rule of thumb, advance rates are based on twice the level of dilution, plus 5. So, for example, if a company has 4% dilution, the advance rate would be 87%.
HEADROOM: The excess availability from the borrowing base over and above the actual forecast usage. ‘Headroom’ is to ABL what a revolving credit facility is to a leveraged loan.
12Asset-Based Lending
Figure 3a: Accounts Receivable Borrowing Base
A Non notified/excluded accounts include all Inter-Company sales, cash or pro-forma sales and sales that are deemed non fundable.
B Eligible AR collateral by currency and/ or company when consolidated into a single Borrowing Base.
CValue of any AR that remains unpaid past the eligible funding period. If 50% or more of a receivable is outstanding beyond the eligible funding period the whole balance is reserved.
D Reserve for any potential offset between buyer & seller where they have a reciprocal trading relationship.
E Reserve for all AR that can be returned by a debtor or is in dispute.
F Value of rebates/over riders due to debtors. These amounts are ‘dilutive’ to the ABL’s eligible collateral.
GPrime debtor limit set based on assessment of borrower & debtor credit quality combined with sale terms, payment history and location of debtor.
H Value of any Payables outstanding beyond payment terms to carriers who ship/deliver the borrower’s goods to debtors.
I Reserve for all ‘high risk/sanctioned ‘ debtor territories, under or non insured debtors.
J Total value of all Eligible AR Collateral in ‘base currency’ on which the Advance Rate is applied.
K The %age at which the ABL advances funding against the AR based on the overall collateral evaluation.
L The forecast usage of the AR Borrowing Base based on the pro forma capital structure of the transaction (figure 5).
M The difference between the actual Availability generated from the Borrowing Base and the draw down required by the borrower.
Availability Calculation / Borrowing Base
ACCOUNTS RECEIVABLE CALCULATION
Ledger Ledger1 Ledger2 Ledger3
Units / CY Total GBP GBP USD EUR
Date of AR Ledger: 31/11/2014 31/11/2014 31/11/2014 31/11/2014
Exchange Rates: 1 1.5785 1.2585
Gross AR Balance £18,183,301 £15,247,841 $1,543,275 € 2,463,860
GBP Equivalent £977,685 £1,957,775
Less:
Non-Notified/Excluded Accounts £67,868 £15,108 $83,281 € 0
GBP Equivalent £52,760 £0
Notified Ledger Balance: £18,115,434 £15,232,733 $1,459,994 € 2,463,860
Less Ineligibles:
Past Due (per Ageing) & Cross Age > 50% 7.13% 90 days EOM £1,297,043 £1,173,998 $70,644 € 98,554
Credit Balances in Past Due £4,123 £3,343 $1,231 € 0
Contra Offset to Payables £176,243 £176,243 $0 € 0
Credit Note Issuance Lag and Disputes £0 £0 $0 € 0
Sale or Return Terms & Invoiced Pre-Delivery £0 £0 $0 € 0
Direct Receipts £0 £0 $0 € 0
Accrued Retros £0 £0 $0 € 0
Debtor Spread Restriction - % of Notified Ledger £0 £0 $0 € 0
Exotic Debtors (Non-OECD or EEA Territories) & Excess over Credit Insurance Limits £49,491 £0 $0 € 62,285
Export Restriction £0 £0 $0 € 0
Carrier Preferential Creditors £63,475 £63,475 $0 € 0
Non-Invoice Debits/GL & MI, Current Funder variance £0 £0 $0 € 0
Excess Dilution (Sales) if fixed AR Advance Rate 3% £0 £0 $0 € 0
Other Creditors and Accruals £0 £0 $0 € 0
Total Ineligibles £1,590,375 £1,417,059 $71,875 € 160,839
GBP Equivalent £45,534 £127,802
Net Eligible £16,525,038 £13,815,674 $1,388,119 € 2,303,021
GBP Equivalent £879,391 £1,829,973
Advance Rate 85% 85% 85% 85%
Availability £14,046,282 £11,743,323 1,179,901$ €1,957,568
GBP Equivalent £747,483 £1,555,477
Effective Advance Rate on Notified Ledger 78% 77% 83% 79%
Facility Limit £18,500,000
Availablity £14,046,282
Drawdown as per Capital Structure 31/11/2014 £9,875,000
Headroom/Excess Availability £4,171,282
Due Diligence
B
A
C
D
F
E
GH
I
J
K
LM
B B
13Structuring the deal
Inventory carries a much higher risk profile, particularly since it changes regularly, so typically attracts up to 75% of appraised value (which would be based on the lender’s ‘net orderly liquidation value’, and which would also include details of how the assets would be sold). See Figure 3b for an examples of an inventory borrowing base.
Fixed asset term loans are not considered suitable for borrowing bases and as such are structured as straightforward amortising term loans. They are always subject to a third party
appraisal which is payable by the borrower. The debt quantum and the loan amortisation are linked to both the borrower’s ability to service and repay debt from free cash flow and the valuation of the applicable asset.
Plant and equipment is typically offered around 75p in the pound against an ex-situ/appraised forced-sale valuation whilst property would attract a similar rate, but would also be subject to lender valuations based on a 365 day open market value to take into account a potentially longer sale process.
Figure 3b: Inventory borrowing base
“ How much a company can borrow is determined by its collateral base”
ACombined gross value of all Raw Materials, Work In Progress and Finished Goods held by the borrower.
B
Exclusions for slow moving, obsolete, returned Inventory, Raw Materials or goods subject to ROT, Packaging , WIP, stored at a third party location, damaged...
CInventory value derived from historic sales & margin, mix and cost analysis by the appraiser.
D
Appraisers calculation of all costs associated with liquidating and disposing of all inventory in a given period of time via a preferred method. Usually 120 days.
E
The Advance Rate the ABL determines is appropriate for the types of inventory being funded taking into account the appraisers comments, recommendations and the overall transaction and lending structure
FMandatory statutory reserves the ABL would have to pay to Creditors in order to realise its lending in an insolvent liquidation scenario.
Inventory Borrowing Base (NOLV based Appraisal)31/10/2014
£M GBP Per Appraisal Per UnderwriteGross Inventory at Cost £5,953,223 £5,953,223Less:Excluded £2,000,248 £2,000,248Appraised Inventory at Cost Price £3,952,975 £3,952,975
Gross Orderly Liquidatiion Value £5,533,203 £5,533,203
Less:Liquidation Expenses £974,958 £974,958Net Orderly Liquidation Value £4,558,245 £4,558,245
Advance Rate 85% 85%Gross Availability £3,874,508 £3,874,508
Less:Specfic Reserves £0 £30,000Enterprise Act £600,000 £600,000Preferential Creditors £40,000 £40,000Net Availability £3,234,508 £3,204,508Effective Advance Rate on cost 54% 54%
A
B
C
D
E
F
14Asset-Based Lending
The ABL will use the outputs of the collateral due diligence and appraisals and overlay them onto the borrower’s monthly projected forecasts. This ‘forecast availability schedule,’ which will take into account seasonality and expected growth rates, will help lender, sponsor and borrower assess the levels of
ongoing working capital headroom generated by the facility.
The example in Figure 4 shows forecast availability driven from an ABL’s own due diligence analysis versus the company’s expected borrowing. The difference between the two is the headroom.
Cash-flow loansSome ABL providers may extend a cash-flow-based term loan (sometimes referred to as a ‘strip’ or an ‘air ball’) to borrowers with strong capital structures and sufficient free cash flow to service the debt (as measured by the fixed charge coverage ratio).
This type of loan is secured but not collateralised against specific assets – as such it tends to be extended over and above the asset-based borrowings. Such a facility provides the borrower with more liquidity for its working capital revolver, meaning it enhances headroom or potentially allows the sponsor to inject less of their own money, thereby enhancing their own returns.
Figure 4: Headroom and Total Availability
£4,000,000
£3,500,000
£3,000,000
£2,500,000
£2,000,000
£1,500,000
£1,000,000
£500,000
£0
£20,000,000
£17,500,000
£15,000,000
£12,500,000
£10,000,000
£7,500,000
£5,000,000
£2,500,000
£0
Oct
14
Nov
14
Dec
14
Jan
15
Feb
15
Mar
15
Ap
r 15
May
15
Jun
15
Jul 1
5
Aug
15
Sep
15
Oct
15
Nov
15
Dec
15
Total AvailabilityHeadroom
HE
AD
RO
OM
TOTA
L A
VA
ILB
ILIT
Y
Figure 5: Illustrative all asset ABL capital structureFig.5 ABL Capital Structure
Gross Ineligible Net Eligible Advance RateStatutory Inventory
Reserves Availability Drawdown Headroom Facility CapAccounts Receivable (i) £18,183,301 £1,590,375 £16,525,038 85% £14,046,282 £9,875,000 £4,171,282 £18,500,000Inventory (i) £5,533,203 £974,958 £4,558,245 85% £670,000 £3,204,508 £1,602,254 £1,602,254 * see belowMachinery & Equipment (ii) £2,500,000 £2,500,000 75% £1,875,000 £1,875,000 £0 £2,625,000Freehold Property (iii) £2,000,000 £2,000,000 75% £1,500,000 £1,500,000 £0 £1,800,000Cash Flow/Air Ball/Top Slice (iv) £2,000,000 £2,000,000 £2,000,000 £0 £3,600,000
£30,216,504 £25,583,283 £22,625,790 £16,852,254 £5,773,536 £26,525,000* Inventory is a £4,000,000 sub limit of the AR facility
Term ProfileMonthly
Amortisation Annual Amortisation Bullet on Maturityi. Revolving facility 5 Year Revolving £0 £0 £0ii. 5 Yr fully amortising term loan @£31,250 p/m 5 Year Term £31,250 £375,000 £0iii. 10 Yr amortisation profile 5 yr term @ £12500 p/m 5 Year Term £12,500 £150,000 £750,000iv. 3 Yr amortisation profile @ £55,583 p/m 3 Year term £55,583 £667,000 £0
£99,333 £1,192,000 £750,000
15Structuring the deal
Fig 6. Transaction Sources & Uses
SOURCES USESABL Revolver Availability £17,250,790 Purchase Price £20,104,111ABL Term Debt Availability £5,375,000 Working Capital £1,448,143Deferred Consideration £0 All Fees £900,000Management Equity £300,000 Headroom £5,773,536Sponsor Equity £300,000Sponsor Loan Notes £5,000,000TOTAL £28,225,790 £28,225,790
ABL Closing fee 100 bps£26,525,000 x 100 bps = £265,250
Figure 6: Transaction Sources and Uses
Capital structureOnce the borrowing base has been calculated the ABL will assess whether the size and structure of the revolving facility, when combined with any term loan component, meets what the sponsor/borrower is looking for in meeting immediate transaction financing needs, as well as delivering sufficient working capital.
The example in Figure 6 above builds on the ABL capital structure in Figure 5 and illustrates how the ABL facilities fit in to a fully funded capital structure.
Monitoring and reportingIn addition, because ABL facilities tend to be revolving, the borrowing base is a dynamic structure that will fluctuate with the value of the assets. This is where the company’s finance team need to work hand-in-glove with the ABL to ensure an open information flow over agreed periods.
As each borrower and asset base is different, reporting requirements will vary. Information reporting could be required on a monthly rather than weekly basis, covenants might be tested less frequently, and there may be fewer disclosure requirements.
The final part of this process is the ABL sanity check. Now there is visibility of the business, is the package what the sponsor requested, does it provide sufficient headroom for the target’s working capital requirements and transaction structure, and can we deliver?
If the answer is still ‘yes’, then the credit paper will be submitted, approval will be obtained, a formal offer letter will be issued, and the process enters its final stages.
“ As each borrower and asset base is different, reporting requirements will vary”
1. The total of Accounts Receivable and Inventory Availability in the ABL Capital Structure (Figure 5, page 14)
2. The total of Machinery & Equipment, Freehold Property and Cash Flow/Air Ball/Top Slice Availability in the ABL Capital Structure (Figure 5, page 14)
16Asset-Based Lending
Final steps LegalWhile the bulk of the preparation is now complete, how long it takes from here to completion is largely down to the sponsor/borrower, and as with all transactions it can range from several days to many months.
One sure way to ensure a smooth process is to use legal counsel that has a specialist banking team familiar with and experienced in asset-based structures. It is worth noting that ABL documents are not standardised, although they are becoming more sensitive to private equity-specific needs around elements such as committed facilities.
Know your ABL team
As a borrower you will be required to have completed and passed all the lenders ‘Know Your Customer’ compliance requirements, but how well do you know your lender? These are not people you will deal with only at ‘liquidity’ or ‘credit’ events, but on an on-going basis. The typical ABL team looks like this:
THE ORIGINATOR
The business development manager will source deals, assess their applicability to the lending organisation and negotiate all the terms, is responsible for managing the transaction process, and ultimately ensures the deal can be delivered and is funded.
THE ANALYST
The field audit/due diligence/collateral analyst who will go on-site, inspect facilities and validate collateral before, during and after completion.
THE UNDERWRITER
Works in close co-operation with the originator in analysing opportunities, investigating the background of target companies, their people and financials, and responsible for presenting the credit proposal in a coherent manner that ensures any risks are mitigated and the basis of the lend is robust.
THE PORTFOLIO MANAGER
The relationship manager who is the day-to-day point of contact for the customer, responsible for monitoring the business’s situation, protecting the relationship, supporting the borrower in their evolving needs, through good times and, if necessary, more challenging times.
“ Use legal counsel that has a specialist banking team familiar with and experienced in asset-based structures”
17Structuring the deal
The ABL loan document contains much that is familiar from leveraged loan documents but are not yet standardised in the way LMA documents have become. For instance, there are provisions solely related to the asset base and information provision and monitoring that are not found in leveraged loan documents.
Prior to the drawing up of legal documents, the private equity sponsor may have several points of negotiation to the Offer Letter before deciding upon a final ABL provider. The Financial Director of the target company may also have opinions about the facility that could change things. But assuming there are no real obstacles (and there very rarely are at this stage), and condition precedents can be satisfied, we move to the final step.
The ‘Take-on’This refers to updating collateral reports and agreeing the final availability figures. The Relationship Manager of the ABL provider will then guide the management through the ABL systems and processes, and provide manuals and tutorials.
After this point, the transaction process is finally complete.
Syndication
There is an active ABL syndication market, with cooperation driven by the ABL providers themselves rather than capital markets intermediaries. ABL providers tend to have a good working relationship, and regularly collaborate to deliver larger lending facilities.
In addition, there is an active cross-border syndicated ABL market in operation with US ABLs investing into the UK and Continental Europe, as well as several home grown providers. Some of the largest European ABL deals have been the ‘foreign’ components of US originated deals, with recent examples of European collateral sub-limits pushing the US$1 billion mark; although it should be noted that these have been for large international corporates with strong credit ratings.
When considering cross-border transactions, it is important to know your lenders, and be comfortable with their international capabilities. Not all European jurisdictions are ABL friendly and in many cases facilities are limited to receivables financing due to European banking regulation and the lenders’ subsequent ability to take security.
18Asset-Based Lending
Conclusion Asset-based lending can be a powerful weapon in a private equity sponsor’s armoury. Provided the target company has some solid assets (heavily contractual service businesses tend to be less suitable for instance) it can be a simple, inexpensive and flexible form of funding, both for acquisitions and financing existing portfolio companies either for growth or to fund dividend recaps on the back of some solid assets.
Using the typical ABL structures in Figures 6 and 7, the following illustration shows what the pro-forma capitalisation of a private equity acquisition funded by asset-based lending could look like.
The relationship with the lender tends to be quite different to that of a leveraged loan provider, and this can be both unsettling for those unfamiliar with the process, and a great comfort to those sponsors and borrowers that value a true partnership approach, one which will support the company through its growth phases and potential future ownership changes.
The story of ABL in recent decades has been one of evolution: with an initial focus on
working capital assets, ABL has developed into a broader corporate funding product based on the depth of a borrower’s balance sheet, whilst it has simultaneously evolved beyond mainly manufacturing and industrial assets to encompassing a far wider range of underlying assets.
Today ABL is used in complex, international transactions across a wide range of sectors, from retail through to distribution, logistics, various forms of manufacturing, equipment rental and recruitment. It can constitute the sole debt piece or can be used as part of a structured finance package that includes mezzanine and other debt components. Its appearance in Unitranche loan structures is also no longer a rarity. In the US it is a staple part of the corporate finance structure on most sponsored transactions.
In the UK asset-based lending has historically played second fiddle to leveraged loans for financing private equity transactions. Experience from other markets suggests UK-based sponsors could take more advantage of this simple and flexible form of finance.
Fig 7. Proforma Capitalisation
Opening Amount % of TotalDebt to Adj
EBITDA Pricing Base + bps Interest Snr Debt Fixed ChargesABL AR & Inventory £17,250,790 61% 225 Paid £0ABL M&E £1,875,000 7% 325 Paid £375,000ABL Property £1,500,000 5% 325 Paid £150,000ABL Cash Flow £2,000,000 7% 400 Paid £667,000TOTAL ABL DEBT £22,625,790 80% 4.2 X
£1,192,000Sponsor subordinated loan notes £5,000,000 18% 1000* Paid/PIKDeferred consideration Loan noteTotal Other Debt £5,000,000 18% 0.9 X
Equity £600,000 2% 0.1 X
Total Consideration £28,225,790 100% 5.3 X
EBITDA TTM Sep 14 £5,740,000Adjusted EBITDA £5,360,750Capex -‐ New, replacement, maintenance £2,125,000Annual Senior Debt Fixed Charges £1,192,000 Snr debt Loan Notes TotalTotal Paid Interest £800,000 * Interest Paid £500,000 £300,000 £800,000
FCCR = EBITDA -‐ Non Financed CAPEX/Scheduled Debt Repayment+ Paid Borrowing Costs + Loan Note Redemptions
£5360.75-‐£2125/£1192+800 =
1.62 : 1 * Interest PIK 0 £200,000 £200,000Interest Cover = EBITDA -‐ Non Financed Capex/ Paid Borrowing Costs
£5360.75-‐£2125/800 = 4.0 : 1
Figure 7: Pro-Forma Capitalisation
“ ABL has developed into a broader corporate funding product based on the depth of a borrower’s balance sheet”
O&OE
All tables are for illustrative purposes only.
Private equity firms looking to maximise their borrowing capacity can turn to Wells Fargo Capital Finance for flexible, innovative financing. We provide comprehensive asset-based lending and technology finance to a wide spectrum of companies across the U.K.
Comprehensive asset-based financing As a leader in asset-based financing, we offer tailored funding structures for mid to large corporates facing a variety of situations, including growth, leveraged buyouts, refinancing, restructuring, early and mid-stage turnarounds, and mergers and acquisitions.
Technology finance Public and private enterprise software and technology companies can access senior secured credit facilities structured on recurring revenues, cash flow, or a combination of both. Companies typically use the facilities to finance acquisitions and recapitalisations, as well as for working capital and organic growth initiatives.
We are available to take your calls Mondays through Fridays, 9:00 a.m. to 5:00 p.m. GMT, excluding UK bank holidays. Call costs may vary — please check with your telecommunications provider. Calls may be recorded for security purposes and so that we can monitor the quality of our service.
Wells Fargo Capital Finance is the trade name for certain asset-based lending and senior secured lending services of Wells Fargo Capital Finance (UK) Limited and Wells Fargo Bank, National Association (WFBNA). Wells Fargo Capital Finance (UK) Limited is a wholly-owned indirect subsidiary of WFBNA, and a private limited company incorporated under the laws of England and Wales with its head office and registered office at 5th Floor, Bow Bells House, 1 Bread Street, London, EC4M 9BE. Wells Fargo Capital Finance (UK) Limited is registered with the UK’s Companies House under company number 02656007. WFBNA is a national banking association organised under the laws of the United States with its head office at 420 Montgomery Street, San Francisco, CA 94104, USA. WFBNA is registered with the U.S. Office of the Comptroller of the Currency. WFBNA is registered with the UK’s Companies House under number FC026633. WFBNA is subject to regulation by the Financial Conduct Authority in the UK and limited regulation by the Prudential Regulation Authority. Details about WFBNA’s regulation by the Prudential Regulation Authority are available from WFBNA on request.
© 2015 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. WSC-1237818
Work with a proven and experienced lender
For more information, contact Wells Fargo Capital Finance todaySteven Chait, Managing Director, EMEA Regional Head+44 (0)845 641 8888wellsfargocapitalfinance.co.uk
Success stories
Loch LomondSpirits distiller
We served as Joint Lead Arranger on an asset-based credit facility that supported the acquisition of Loch Lomond by Exponent Private Equity.
Kurt Geiger Luxury footwear retailer
We provided a global asset-based financing solution to support the acquisition of The Jones Group by Sycamore Partners and the subsequent management buyout of Kurt Geiger.
IntellifloLeading provider of front and back office software to financial advisors
We served as Agent and Arranger on a senior facility to support HgCapital’s investment in this market-leading software company.
Private equity firms looking to maximise their borrowing capacity can turn to Wells Fargo Capital Finance for flexible, innovative financing. We provide comprehensive asset-based lending and technology finance to a wide spectrum of companies across the U.K.
Comprehensive asset-based financing As a leader in asset-based financing, we offer tailored funding structures for mid to large corporates facing a variety of situations, including growth, leveraged buyouts, refinancing, restructuring, early and mid-stage turnarounds, and mergers and acquisitions.
Technology finance Public and private enterprise software and technology companies can access senior secured credit facilities structured on recurring revenues, cash flow, or a combination of both. Companies typically use the facilities to finance acquisitions and recapitalisations, as well as for working capital and organic growth initiatives.
We are available to take your calls Mondays through Fridays, 9:00 a.m. to 5:00 p.m. GMT, excluding UK bank holidays. Call costs may vary — please check with your telecommunications provider. Calls may be recorded for security purposes and so that we can monitor the quality of our service.
Wells Fargo Capital Finance is the trade name for certain asset-based lending and senior secured lending services of Wells Fargo Capital Finance (UK) Limited and Wells Fargo Bank, National Association (WFBNA). Wells Fargo Capital Finance (UK) Limited is a wholly-owned indirect subsidiary of WFBNA, and a private limited company incorporated under the laws of England and Wales with its head office and registered office at 5th Floor, Bow Bells House, 1 Bread Street, London, EC4M 9BE. Wells Fargo Capital Finance (UK) Limited is registered with the UK’s Companies House under company number 02656007. WFBNA is a national banking association organised under the laws of the United States with its head office at 420 Montgomery Street, San Francisco, CA 94104, USA. WFBNA is registered with the U.S. Office of the Comptroller of the Currency. WFBNA is registered with the UK’s Companies House under number FC026633. WFBNA is subject to regulation by the Financial Conduct Authority in the UK and limited regulation by the Prudential Regulation Authority. Details about WFBNA’s regulation by the Prudential Regulation Authority are available from WFBNA on request.
© 2015 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. WSC-1237818
Work with a proven and experienced lender
For more information, contact Wells Fargo Capital Finance todaySteven Chait, Managing Director, EMEA Regional Head+44 (0)845 641 8888wellsfargocapitalfinance.co.uk
Success stories
Loch LomondSpirits distiller
We served as Joint Lead Arranger on an asset-based credit facility that supported the acquisition of Loch Lomond by Exponent Private Equity.
Kurt Geiger Luxury footwear retailer
We provided a global asset-based financing solution to support the acquisition of The Jones Group by Sycamore Partners and the subsequent management buyout of Kurt Geiger.
IntellifloLeading provider of front and back office software to financial advisors
We served as Agent and Arranger on a senior facility to support HgCapital’s investment in this market-leading software company.
About the SponsorsBNP Paribas Commercial Finance
BNP Paribas is a leader in ABL across Europe and beyond.
With operations from Portugal in the west to Turkey and in the east we offer an unrivalled capability to fund asset based deals in 15 European jurisdictions.
We combine the balance sheet strength of one of Europe’s leading banks with the local expertise of ABL practitioners on the ground to deliver appropriate ABL funding solutions to a range of corporate clients. Our products range from simple single country debtor funding through non-recourse solutions to multi-jurisdictional asset based lines.
Our people have considerable experience in working alongside Private Equity in a variety of transactions both in the UK and across multiple European jurisdictions and beyond.
As the ABL arm of one of the best capitalized banks in the world, we stand ready to assist the Private Equity community in creating value both within existing portfolios and across new acqusitions.
PNC Business Credit
At PNC Business Credit, ‘Done Deal’ is more than a tag line. It defines our business.
PNC Business Credit is one of the leading U.K. Asset-Based lenders to the Private Equity community, advisors and companies alike. We provide funding solutions for mid-market companies that deliver detailed understanding and flexibility, combined with unparalleled client access to our senior team
Optimum levels of finance for event driven change
• Mergers & Acquisitions• Management Buy Out/Buy In• Recapitalisation• Refinance• Growth• Restructure/Turnaround
PNC finds value in;
• Accounts Receivable• Inventory• Machinery• Freehold Property• Intellectual Property – Brands
PNC Business Credit is part of the United States based PNC Financial Services Group Inc, a retail banking and financial services group. With assets in excess of $300bn, deposits of over $200bn, a Tier 1 core capital ratio of 10% and in excess of 38,000 customers and 57,000 employees, which makes PNC one of the largest banking institutions in the US.
Contact
T: +44 (0) 1444 475820
E: DoneDeal@ pncbusinesscredit.co.uk
W: AssetBasedLendingUK.co.uk
Wells Fargo Capital Finance
Wells Fargo Capital Finance provides comprehensive asset-based lending and technology finance to a wide spectrum of companies across the UK. With offices in London, Birmingham, and Manchester, we bring a strong and proven track record of working with clients to develop their businesses. We deliver flexible financing options for companies facing a variety of situations, including: early and mid-stage turnarounds, growth, leveraged buyouts, refinancing, restructurings, and mergers and acquisitions.
We work with public and private UK-based companies, in addition to US and Canadian businesses, and multinational businesses with operations in the UK, Western Europe, the US, Canada, and beyond. As part of Wells Fargo & Company, a leading financial services provider with a long-standing reputation for strength and stability, we can offer access to a wide range of products and services aimed at helping companies succeed.
For more information, visit www.wellsfargocapitalfinance.co.uk
British Private Equity & Venture Capital Association
5th Floor East, Chancery House, 53-64 Chancery Lane, London WC2A 1QS T +44 (0)20 7492 0400 [email protected] www.bvca.co.uk
