Financier World:  How would you describe the current state of the ABL market?

Steven Chait:  It is important firstly to distinguish between ABL and Comprehensive ABL (CABL). ABL includes single asset finance such as invoice discounting, whereas CABL is secured lending against all assets in a business including, stock, debtors, property and plant and machinery. The CABL market in 2010 has been quieter than many commentators had predicted in the mid-market, i.e., where borrowings exceed £10m. There are a number of factors that have influenced this, such as the low interest rate environment and HMRC’s Time to Pay. This has given a number of corporates significant breathing space to deal with the effects of the recession without the need to refinance. Furthermore, businesses generally have borrowed less as the whole economy has deleveraged. The UK clearing banks, who dominate the corporate lending market, have all established asset-based divisions within their organisations, however they have been slow to embrace the product in its comprehensive form. They have focused their ABL offering on factoring and invoice discounting. There is definitely a trend in the clearing banks to secure previously unsecured loans using ABL. In line with other forms of lending, CABL has also gone through a period of adjustment. There has been a return to more traditional uses of the product and more conventional structures. Prior to the credit crunch, CABL providers were willing to provide cash flow pieces over and above the value of the assets to get deals done. This is no longer the case. To use the old golfing analogy, most CABL lenders now stick to the fairway.

FW:  Are large-cap corporates turning to ABL?

SC:  During the past few months, a few high profile invoice discounting deals have been announced, such as Carphone Warehouse and Westcon Group, however these deals do not include funding against other assets. The use of CABL amongst large-cap corporates had grown steadily prior to the credit crunch with MFI and Woolworths both securing large CABL facilities. However, post-credit crunch, the number of independent CABL providers has declined following the demise of Landsbanki and withdrawal of GMAC from the market. With fewer competitors around, trying to grow the CABL market by doing the bigger deals is more difficult, especially if the large clearers do not participate and hold levels are reduced. In the US market, CABL is a far more mature product and has been used in several large cap corporates such as Toys R Us and Goodyear Tyre and Rubber Company.

FW:  Does ABL offer a compelling financing option in restructuring scenarios?

SC:  CABL is ideal for restructuring scenarios as the emphasis is on asset values rather than profitability. It is often possible to increase the level of funding available to a company in a declining EBITDA scenario if there is a strong asset base. This is completely different to the traditional leverage model which is focused on profitability, cashflow and loan pay-down. The flexibility and revolving credit aspects of CABL make it particularly useful in supporting turnaround strategies and corporate reorganisations.

FW:  Can it benefit trading businesses that have significant fluctuations in working capital requirements?

SC:  ABL can support businesses that have significant seasonal working capital peaks, such as retailers building up stocks for the Christmas trading period and distributors importing goods from overseas, particularly the Far East. This is particularly important when earnings have been under pressure and the peak seasonal borrowing requirement can be a large multiple of a trailing EBITDA.

FW:  Will the importance of ABL persist beyond the recession?

SC:  CABL is an ideal product for corporates emerging from the recession. Whilst having attempted to deleverage over the last 18-24 months via tighter working capital management and postponement of investment, businesses will need a flexible and supportive financing structure to allow them to emerge out of the recession ahead of their competitors. This will require funding to support sales growth and capital/structural investment and ABL is able to provide such support and flexibility. The product may also help those corporates that might not have been hugely profitable themselves, but are well placed to take advantage of good acquisition or consolidation opportunities. The emphasis on assets rather than EBITDA multiples may enable these businesses to secure funding to assist with acquisition finance that might not be available through traditional banking sources. There is much press comment on the lack of availability of credit from traditional banking sources, however CABL providers have continued to lend to businesses throughout the recession and are continuing to do so. In addition to the lack of new credit available, many UK companies will have to refinance their existing facilities in the next two to four years as a result of three, five and seven year agreements signed between 2005 and 2008 reaching their maturity (commonly referred to as the ‘debt bubble’). This represents an excellent opportunity for CABL to participate in this refinancing activity.

FW:  Can you outline the advantages of ABL for businesses?

SC:  As previously mentioned, the benefits of CABL are numerous but can be summarised as follows. First, it supports businesses undergoing turnaround and reorganisation strategies. Second, the revolving credit aspect relieves the borrower of the burdensome repayment demands and allows for reinvestment of cashflows in growing the business. Third, it supports fluctuating working capital requirements in trading businesses as the funding grows in line with the asset base. There are also a number of ‘intangible’ benefits arising from the implementation of a CABL facility in relation to accounting practices and working capital management and clients usually embrace the product and the associated disciplines of CABL when they see these benefits in practice. For example, we often see significant improvements in both debt and stock turn of our clients as a direct result of the client’s finance department focusing on these areas to maximise funding availability from the CABL facility and as a result a natural level of deleverage will ensue.

FW:  What do companies need to know about meeting the requirements of an ABL facility?

SC:  As a CABL lender, our focus is on the underlying asset collateral or ‘borrowing base’ of a business and the accurate and reliable reporting of same. We would not expect our clients to have to produce more reports than they ordinarily would to run their business properly, however there are often variations that they must make to their systems to ensure the information is available in a format acceptable to us. Time is often spent upfront with prospective borrowers to assess and analyse their MIS to determine how best they can report information to the CABL. It is possible to tailor-make solutions to fit each client’s reporting systems and capabilities. The ABL sector has made significant improvements in its online reporting capabilities in recent years and as a result, clients are able to upload all collateral information themselves via the internet. Over the years we have seen a noticeable improvement in accounting systems and most clients easily adapt to ABL reporting requirements.

FW:  What considerations are ABL providers facing when structuring facilities in the current economic environment?

SC:  CABL lenders have become more conservative in their approach to new facilities since the credit crunch. Holding and underwriting levels have reduced, resulting in more deals being clubbed. In addition, advance rates have returned to more conventional and conservative ‘secured’ levels, with a move away from the ‘asset stretches’ that were a feature of the ‘pre-crunch era’. Typical CABL lenders will advance against most tangible assets, such as debtors, stock, property and plant and machinery, but very few advances are currently being made against intangibles assets such as brands and IP.

FW:  What valuation issues are asset-based lenders facing in the current market?

SC:  The borrowing capacity of any CABL facility is a function of the quality and quantum of the underlying collateral, as demonstrated by the valuation of the assets. Such valuations, particularly in relation to property and plant and machinery, have been adversely affected by the credit crunch with valuers becoming more cautious, perhaps to more realistic levels given the current economic uncertainty. However, advance rates against these assets and appetites to fund have remained relatively constant and significant leverage can still be obtained for a business with an asset-rich balance sheet. Stock valuations are dependent on the nature and type of stock involved, albeit lending against raw materials and work in progress requires more sophistication and an understanding of the exit strategy to determine the valuation.

FW:  Are you seeing ABL being used to facilitate M&A transactions?

SC:  The CABL product is a very useful tool for use in many M&A transactions and it is possible to leverage the assets of both an acquiror and its target to assist in the financing of an acquisition. Often the headroom generated can be used as the quasi equity in the transaction and to support the immediate working capital requirements of the enlarged group. The critical issue in M&A deals is having the time to do the upfront due diligence and valuation work in order to put a CABL facility in place. Often vendor due diligence, which is prepared at a significant cost and effort, largely ignores the asset valuations, which means the CABL lender needs to carry out additional appraisals and due diligence on the asset in order to determine their value. Temporary measures can be developed to circumvent these issues by working with the acquirors to develop funding structures that allow the transaction to take place within the vendors’ timescales, but perhaps increasing the leverage against the acquired assets post-completion when full due diligence can be undertaken.

Steven Chait - Director and Head of New Business at Burdale Financial Limited

Steven Chait is a Director and Head of New Business at Burdale Financial Limited (a wholly owned subsidiary of the Bank of Ireland Group) and has responsibility for growing Burdale’s asset-based lending business in the UK. He joined Burdale in 1992 and has served in a number of different roles including, accounting, credit and new business development. During this time, Mr Chait has been a key member of the team, involved in all aspects of the business that has seen it change from a small private equity-backed trade finance company into a well respected and successful leader in asset-based lending, with operations in both the UK and US. Mr Chait qualified as a Chartered Accountant with Arthur Andersen after graduating in Accounting and Economics from Manchester University. He can be contacted on +44 (0)203 201 6831 or by email: schait@burdale.co.uk

Copyright 2010 Financier Worldwide. Financier Worldwide Magazine is a leading source of corporate finance intelligence. Each monthly edition provides financial insight and analysis to a unique audience of dealmakers responsible for structuring, negotiating and executing the deals that move markets and shape the global corporate economy. For more information, visit www.financierworldwide.com

Held in the Drapers’ Hall in the City of London, the evening was attended by industry guests including retailers, private equity investors, equity advisers, turnaround and restructuring specialists, debt advisers and bankers.

The Drapers’ Company was founded over 600 years ago and from the outset it was a benevolent institution helping its members who fell into distress – a bit like an early turnaround fund – and entirely in keeping with the evening’s theme.

Dinner was followed by a panel discussion with: Luke Johnson (Chairman of Channel 4 Television and Risk Capital Partners) representing corporate birth; Ian Gray (Chairman of Robert Dyas and Scala, and a fellow of the Institute of Turnaround) representing turnaround; and Neville Kahn (Deloitte Reorganisation Services Partner) representing decline and resurrection.

Audience members were also asked to contribute their views on a number of key retail issues through an electronic voting system.

In summary the audience was bearish on the outlook for the economy. Less than 3 per cent thought that the economy would make a quick ‘V’ shaped recovery, compared to over 72 per cent who thought the recovery would be slow or very slow.

The audience was also conservative on investment prospects for the retail sector, with 57 per cent voting in favour of non-cyclical food grocers in comparison to homewares, DIY and electricals, which received a mere 7% of the vote. Interestingly the biggest threat to retail was seen to be the shift to new media and increasingly rapid changes in consumer tastes, with 57 per cent of the vote, in comparison to bureaucracy and red tape, which obtained 28 per cent of the vote.

Full results can be found below.

Dennis Levine, Chairman of Burdale Financial Limited commented: “On behalf of Burdale I would like to thank all of our guests for attending the dinner and contributing to our industry poll. In particular we were delighted to have the participation of such a distinguished panel of panellists, Luke, Ian and Neville, who generously shared their industry knowledge and insight to make it a truly enjoyable and informative evening for all.”

Question 1: Who do you think you are?
A. A retailer, private equity investor or equity adviser (29.5%)
B. A turnaround specialist (31.1%)
C. A debt advisor, banker (27.9%)
D. OMG, diary cock-up, I’m a week early for the BRC Dinner, LOL (11.5%)

Question 2: What shape’s your downturn?
A. “V” Shaped – A quick recovery (2.4%)
B. “W” Shaped – Bear market rallies (25.0%)
C. “Bath” Shaped – Slow recovery (46.0%)
D. “L” Shaped – An “L” of a long time (26.6%)

Question 3: Place your bets
A. Homewares, DIY, electricals – even a turkey can fly in a hurricane (6.5%)
B. Clothing, health & beauty – recession-chic to recovery treat (21.3%)
C. Food grocers – defensive, but big growth potential in non-food (56.6%)
D. Buying opportunity?? Bye bye retail shares……. (15.6%)

Question 4: Clicks or mortar, how would you grow?
A. Stores only – back to basics (4.9%)
B. Clicks ’n’ Mortar – a balancing act (54.5%)
C. Interweb only – an Apple in one hand, a Wang in the other – bliss! (24.4%)
D. You’d need your head examining to launch a retail business now (16.2%)

Question 5: What is a CVA?
A. Company Voluntary Arrangement (50.4%)
B. Creditors VERY Angry (16.3%)
C. Circling Vultures Attack (5.7%)
D. Created by Voracious Accountants (27.6%)

Question 6: How much is 114m sq ft?
According to Richard Hyman, UK retail has added a net 58m sq ft of space and the growth of online sales has added the equivalent of 56m sq ft – a total of 114m sq ft. To put this in perspective, that’s the equivalent of:
A. 7,350 Buckingham Palaces (17.1%)
B. 130 Millennium Domes (23.1%)
C. 1 Michael Jackson Neverland ranch (8.5%)
D. All of the above (51.3%)

Question 7: Finance for retail start-ups/ expansion/ turnaround plans is:
A. Rare as an investment banking bonus (18.1%)
B. Fairly scarce (37.7%)
C. Available at a price (43.4%)
D. As plentiful as the unsold books at a Katie Price book signing (0.8%)

Question 8: Credit where credit’s due
Bill Grimsey, CEO of Focus DIY, has said of the credit insurers that “they are fair-weather friends
who don’t go into enough detail, make unilateral decisions with short notice, and jeopardise
the future of businesses”. Do you agree with him?
A. Credit insurance is a fundamentally flawed business model (25.6%)
B. Well done Bill for articulating what others think (57.9%)
C. Credit insurers are doing a reasonable job in a tough market (13.2%)
D. KILL BILL….. (3.3%)

Question 9: Pre-packs, love them or loathe them
A. A useful tool to preserve some value when businesses are failing (43.3%)
B. Useful but possibly open to abuse in unethical hands (42.5%)
C. Evidence of crony capitalism (5.8%)
D. I’ve only come across pre-packs in IKEA (8.3%)

Question 10: Crystal ball time, the biggest threats to retail is?
A. Bureaucracy, red tape, working time directive etc (27.9%)
B. Hiring quality staff and young people (11.7%)
C. Minimum wage inflexibility (3.6%)
D. New Media – increasingly rapid changes in consumer tastes (56.8%)

The panel

Luke Johnson is Chairman of Channel 4 Television and Risk Capital Partners, a private equity firm. He was Chairman of Pizza Express during the 1990s and is currently an owner and Chairman of Giraffe restaurants and Patisserie Valerie, amongst other companies. He has also owned companies in recruitment, dentistry and retailing. For eight years he wrote a column on business in The Sunday Telegraph and now writes a weekly column for The Financial Times. After graduating in medicine from Oxford he worked as a stock broking analyst.

Ian Gray is currently Non-Executive Chairman of Scala Collections Limited, a mail order retailer of ladies apparel which operates under the brand names of Artigiano and Spirito. He is also a Non-Executive Director of Robert Dyas, where he recently led the Management Buy Out, and of The Kent Messenger Group. Ian is a Fellow of the Institute of Chartered Accountants and a Fellow of the Institute for Turnaround. Among his wide-ranging assignments, Ian’s boardroom experience includes numerous PLCs, and spans many different industry sectors including apparel, biotech, construction, distribution, electronics, engineering, FMCG, healthcare, leisure, manufacturing, media, retail, telecoms and travel. Ian Gray is a director of Baronsmead Consulting.

Neville Kahn is a Deloitte Reorganisation Services Partner and has over 20 years’ experience in restructuring. Neville has acted as lead insolvency practitioner on a number of complex administrations and receiverships, including Mosiac Fashions and Woolworths. He also has experience in strategic and financial business reviews, primarily focusing on developing strategies to protect and improve stakeholder positions. Neville is regularly engaged by debtors, senior and mezzanine lenders and opportunity funds. He has worked in this sector for the past 20 years, and more than 13 as a partner.

Submitted by Judith McMath – FCA, Director, Burdale Financial Limited

www.burdale.co.uk a member of Bank of Ireland Group

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The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People