Asset-based Finance and Secured Lending
Acquisition finance, plant and machinery finance, project development and expansion finance. Excluding specialist transactions: aircraft, film and ship finance
The term ‘asset-based finance’ covers a wide variety of products, where the facility is tied to the value of some assets.
Asset based lending (ABL) includes invoice factoring, inventory finance and loan and mortgage collateralised products. Borrowing base and repo finance would also fall within the scope of ABL.
In the case of asset-based finance, the facility amount available to the borrower will depend on the value of the underlying assets. Of course, the underlying assets will typically be secured (or “repo-ed”) to the lenders.
Depending on the nature of the product, the relevant facility will have its own defining features, which are difficult to consider here. Accordingly, we will focus only on some most common matters arising in ABL.
Naturally, in ABL the valuation of the asset is likely to determine the loan amount available to the borrowers. Some facilities provide that asset value is subject to mark-to-market adjustment; and if such provisions are indeed included, these should be carefully negotiated.
Invariably, an ABL facility will restrict the ability of the borrowers to deal with the secured assets: the restrictions may arise either by commercial reasons or due to requirements of applicable laws. Such restrictions should be tailored to the nature the borrower’s business so as not to interfere with normal operations. For example, with reference to receivables finance, the borrowers may be permitted to vary certain terms of secured receivables so long as this does not materially detract their value as security.
Matters of security are paramount in ABL facilities. Depending on the applicable law, taking security may be cumbersome or even cost prohibitive. The following matters should be considered with reference to applicable law:
- can the security be registered to serve as notice to third parties?
- does taking security or its registration require the payment of any fees?
- does local law recognise the ability of a facility agent to take security and hold it on behalf of a bank syndicate?
- does the local law permit security over future goods?
- does the local law require that the security assets be precisely identified?
- is the local law suitable for the scenario where the pool of secured asset is constantly changing?
- does local law allocate 100% of the value of secured asset to the secured obligations or are certain parts allocated to preferential creditors?
- does local law have effective enforcement procedures? For example, does the law permit foreclosure on the assets (rather than require a sale by public auction)?
- is security resilient in borrowers’ insolvency?
With some regret it must be noted that in many jurisdictions the answers to some of the above questions are not entirely satisfactory. It is presumed that restrictive security laws defend the interests of the borrowers; but really this is not the case.
