Jurisdiction - Singapore
Reports and Analysis
Singapore – Acquisition by ABL.

10 July, 2014

 

 

The Rise Of A New Lending Category

A new category of acquisition finance lender, driven by the rise of asset based lenders, is stepping in to fill the acquisition finance gap left by the retrenchment of traditional lenders. In this article we look at the pressure on traditional acquisition finance lenders, the potential benefits of using asset based lending structures and finally provide an insight on where we have seen these structures being used over the last six to twelve months.

 

The Pressures On Traditional Lenders And The Rise Of Asset Based Lending

Many traditional lenders have been under pressure since 2008 and it is no secret that traditional lenders are facing increased capital costs in light of Basel III (through the Capital Requirements Directive IV and Capital Requirements Regulation, which seek to implement Basel III in the EU). Alongside this stricter regulatory environment is the continued de-leveraging of many lending institutions which has resulted in a reduction of acquisition finance lending. Where lenders are prepared to fund an acquisition we are seeing loans at much lower leverage levels. 


During 2013 we have seen asset based lenders demonstrating an appetite to take up the slack left by traditional acquisition finance lenders. With the Asset Based Finance Association (“ABFA”) statistics showing double-digit (10 – 17%) quarter-on-quarter growth for invoice discounting and strong growth (3 – 7%) for combined asset based lending facilities for each reported quarter during 2013, asset based lending is clearly on the ascendancy.


Invoice discounting is regarded as short-term rather than long-term funding which means there are lower capital requirements for this element of an asset based lending facility. Coupled with the access that certain factoring corporations have to the Funding for Lending Scheme (“FLS”) (discussed below) the playing field is turning the odds in favour of asset based lending.

 

Benefits Of Asset Based Lending 


The ABFA quarterly statistics for 2013 show the top three sectors for asset based lending being distribution, manufacturing and service businesses. These businesses have a broad range of assets which can be financed and over the years asset based lenders have developed their product to fit such businesses. Asset based lending facilities now commonly combine a traditional invoice discounting facility, with any combination of a plant & machinery facility, inventory facility, real estate facility and a non-specifically asset backed term loan facility (depending on the nature of the business being financed). This is particularly beneficial for manufacturing, distribution, service and similar businesses which are likely to have receivables due from financially strong customers, P&M, inventory (either in the form of raw material or processed goods) and potentially long leasehold or freehold real estate assets (for example, manufacturing sites, distribution hubs or headquarters). Additionally, where a business has valuable intellectual property rights (“IPR”) such as trademarks or patents, as might a fashion distributer, there might be further scope for financing against the IPR as further collateral. 


The ability of an asset based lender to provide specific lines of finance against each of these asset classes at varying LTV ratios, combined with a general term loan to the business, means that an asset based loan facility has the potential to exceed the leverage which might otherwise be available from a traditional lender which does not have the systems in place to monitor the receivables and inventory of the borrower to enable it to comfortably lend at comparable leverage levels. Furthermore, asset based lenders, supported by a strong base of collateral and possibly lower capital costs, are often able to offer pricing that compares favourably with traditional acquisition facilities.

 

Recent Market Activity And Trends 


Our experience of the market over recent months is that an increasing number of private equity sponsors are working closely with asset based lenders and using combined asset based lending facilities to portfolio companies to facilitate either new acquisitions, refinancings of historic acquisition debt or release equity from existing portfolio companies. The drivers behind this appear to be twofold; first, the asset based lenders have an appetite to lend against strong businesses in these sectors; and secondly, asset based lenders are often able to lend at higher LTVs than might otherwise be available and at attractive pricing. This means there are significant business opportunities for both asset based lenders and those looking to raise finance, be it private equity sponsors or businesses themselves. 


With the extension of the Bank of England’s FLS until January 2015 and the April 2013 amendment to the FLS adding factoring corporations to the list of eligible organisations, together with the FLS now being skewed in favour of lending to SMEs (to prevent over inflation of the residential housing market), we see 2014 as being a potentially strong year for asset based lending; particularly, for those organisations able to tap into the FLS.
This outlook presents exciting opportunities for a number of market participants. Asset based lenders will be vying to finance the best businesses; whilst businesses and private equity sponsors will have greater opportunity to finance new acquisitions or refinance existing facilities to release equity to owners/sponsors or to provide new capital for investment and growth.

 

RHTLTWlogo+slogan-RGB

 

For further information, please contact:

 

Elisabeth Gaunt, Partner, Taylor Wessing

e.gaunt@taylorwessing.com

 

Andrew Whittaker , Taylor Wessing

a.whittaker@taylorwessing.com

 

RHTLaw Taylor Wessing Banking & Finance Practice Profile in Singapore

 

Comments are closed.