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OCTOBER 2013


Legal Focus


73 Asset Based Finance -


This month we revisit an area we touched upon last year – Asset Based Finance. 12 months on, we speak to Bruce Wood, a partner at Morton Fraser, about the key cases he has worked on over the last year and the current state of the Asset Based Finance market.


What major/interesting cases have you worked on over the last year?


Two cases stand out - not because of the amounts involved but because of their technical legal difficulty. The first was a £200million receivables finance facility where the receivables being acquired were repayments under CCA regulated loans taken out to pay household and motor insurance premiums. The interplay between the requirements of a successful receivables finance transaction, on the one hand, contrasted with the straitjacket of the CCA and the FCA's Insurance Conduct of Business Rules on the other hand, made this all particularly challenging. The second example was, again, a receivables finance deal but, this time, the receivables being financed constituted the income payable to personal insolvency managers or trustees, the English aspects of which were straightforward enough but the Scottish aspects of which were extremely complex.


Otherwise, our focus has been on asset based lending (ABL) where inventory and receivables are funded, possibly along with asset finance and traditional loan lines, on the basis of regular borrowing base certificates. Alongside that, there has been the usual asset and invoice finance business. On asset finance, the flavour of the year, for some reason, has been the funding of remote operating vehicles and off-shore vessels. It never ceases to amaze me how much the fashion of the moment in the asset based finance industry seems to dictate what assets we advise on in any given year.


Research carried out last year showed that an increasing number of cFo's operating in various industries were beginning to look at asset based lending options as a flexible and cost-effective financing tool and not as a last resort to access funding. Has this continued?


It's a long time since asset based lending options were a last resort. Admittedly, though, some bank managers may yet have to catch up with this.


Asset finance has never suffered from a stigma and has, by and large, remained quite a buoyant market through the recession. The big winner, though, has been invoice finance where the funder frequently makes no loss even if the borrower becomes insolvent and the Basel capital adequacy rules are relatively benign. True ABL on the other hand, is really only suitable for the big players. The costs of setting up and then running an ABL line don't make much sense unless the amount funded is at least £20million and the usual ABL lines are well in excess of £50million.


How would you describe the current state of the asset based finance market?


Over the last few years, it has been dominated by new entrants as the asset based finance arms of the big banks were required to re-trench. The names on everyone's lips have included Aldermore, BLME and Close, among others, but most recently, the asset based finance arms of the big banks, including those Government-owned, have come back into the market in a big way offering lower rates than the new entrants - leading to an ongoing shake-up in what parts of the market are targeted by what players. Watching this play out is a backdrop to all our activity this year. On the ABL side, PNC have come in from the US and are making waves joggling the existing players in the market-place.


does asset based finance offer a compelling financing option in restructuring scenarios?


ABL does not but both asset and invoice finance do. ABL does not because it is for the big players, requires a view to be taken on the value of inventory and a convincing track record. Asset and invoice finance, on the other hand, are, or at least can be, self-secured so a track record is not nearly as relevant as it is in traditional bank funding. The other advantage with invoice finance is that the amount advanced is directly related to the payment stream which is coming in, which makes it uniquely suitable for start-ups or a growing company.


What are the current trends in funding and finance?


After a period where it remained steady, our perception is that asset finance funding is growing again though bank-owned lessors


remain


somewhat out of favour with their parents while new entrants make use of that issue to grow their portfolios. Invoice finance is still growing fast and should replace overdraft funding in many industries over quite a short term. ABL is the exciting one, but it is for the bigger players only.


are you seeing asset based finance being used to facilitate M&a transactions?


Yes, again, because it is not just based on historic performance and is self-secured.


It can also


frequently be taken out without disturbing existing banking lines, apart from sorting out priority and intercreditor issues. Again, the great advantage of financing by relation to receivables, is not only that it is self-secured but that the financing can be tailored to the actual level of receivables in a growing business. Currently we are negotiating a £120 million syndicated ABL deal funding a US fund's acquisition of a UK group, so this type of asset based funding can support the largest as well as more run-of-the-mill deals. LM


contact: Bruce Wood Partner direct dial: 01312471026 Email: bruce.wood@morton-fraser.com


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