Asset-Based Lending: A Prime Choice For PE

PitchBook Dealmakers Column

By Ira J. Kreft SVP, Central Region Marketing Manager, Bank of America Business Capital, Bank of America Merrill Lynch 

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The Considerations

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One of the attractive features of asset-based lending is its relatively low cost. The average interest spread over LIBOR based on quarterly pricing from 1Q 2005 to present has been 231 basis points (bps). Better quality credits can be priced at less than 200 bps over LIBOR. This is an important consideration on both a stand-alone basis and on an overall cost of capital basis when the asset-based credit facility is paired with other complementary forms of capital.

Other key benefits are fewer, less restrictive financial covenants, including springing covenant structures; more flexibility in terms of restricted payments; and having prepayable debt that can also fluctuate with working capital needs and be repaid from cash flow generation.

A Complementary Pairing

Asset-based loans pair well with a wide range of debt structures, including traditional subordinated debt, institutional term loans, private direct term loans, convertible debt and high yield debt.  In a bifurcated structure in combination with a direct term lender, the borrower obtains the advantages of asset-based and cash flow loans with an attractive covenant package, and cost of capital and amortization schedule.

The Final Analysis

Asset-based lending has continued to evolve. While in 1Q 2017, over 50% of the volume was in traditional industries, such as distribution/wholesale, retail/supermarkets and general manufacturing, technology and business services represented nearly 25% of the volume. Reporting is less burdensome due to electronic reporting of borrowing base information; and, this along with the aforementioned benefits make asset-based lending worthy of consideration in financing private equity sponsor transactions and portfolio companies.

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