In the latest Debt Advisory newsletter from Clearwater International, we look at asset based finance and its increasing presence in high-growth and private equity backed businesses.
Asset based finance comprises of invoice finance and asset based lending (ABL). It is an established form of financing that has existed for many years, but has more recently seen increased levels of activity in the mid-market and with sponsored businesses. This is primarily due to the funders having an appetite to lend against assets that were previously excluded and the increased competition from new entrants to the market.
Invoice finance is the most common form of asset based finance, where funding is generated against unpaid invoices and is available to businesses that sell products or services on credit. The funding can help bridge the cash flow cycle between work being done and it being paid for. Facilities can increase as the business debtor book increases, therefore is attractive to businesses experiencing growth.
ABL facilities can be provided against debtors, stock, plant & equipment or property assets. We have also seen financing provided against intangible assets and contractual income streams. Funding is provided as a % of the value of each asset class and can, in some circumstances, be topped up with a cashflow loan, subject to debt servicing and leverage covenants.
The advantages of ABL are typically cheaper interest costs than cash flow loans and funding is often provided on a revolving basis with no amortisation. Committed facilities are also available in the market. The disadvantage is the additional administrative burden with increased reporting, and if sales slow or decrease then funding available will reduce.
Private equity has historically been cautious of asset based finance as the industry was seen as a lender of last resort for distressed businesses. An improved reputation of the lenders has meant there is now a growing acceptance of asset based finance as a viable source of funding.
In summary, asset based finance is now a viable and deliverable funding type that can support a range of businesses and shareholder related transactions. The competitive pricing, committed aspect and revolving nature of the facilities can be structured to meet the growth strategies of many mid-market businesses.
Example ABL Private Equity Transactions
Clearwater International’s Debt Advisory team advised Arlington Industries on the £45m (€50m) debt raise from Wells Fargo and Shawbrook Bank for the acquisition of automotive mechanical engineering firm Magal Engineering Group and a refinance of current debt. This will support both the acquisition of Magal Engineering Group and future growth of the enlarged group.
Arlington Industries, backed by US Cartesian Capital Group, provides supply chain integration to global OEMs in the aerospace and automotive sectors. The company’s focus is to deliver greater efficiency, shorter supply chains, and consolidation of product and services to its clients. By acquiring various businesses across the aerospace and automotive industries, Arlington is able to better enhance its supply chain offering and utilise the diverse spectrum of talent across the board. The business provides a vast range of services across the markets, from design to manufacture, as well as welding, pressings, coatings, maintenance and logistics.
Magal Engineering Group is an automotive component and system supplier across Europe, Asia and the US. Magal delivers complex design solutions with a depth of engineering capability and competitive pricing. Recognised as a Tier 1 global strategic supplier to the major OEMs, the business is a preferred supplier to brands such as Ford, Jaguar Land Rover and Renault Nissan amongst others.
Clearwater International has advised private equity firm LDC on the management buyout of TXM Plant, including raising a bespoke ABL debt package from PNC Business Credit. TXM Plant is the UK’s largest supplier of road rail vehicles and associated attachments to Network Rail and its major contractors involved in maintenance, track renewal and infrastructure projects.
TXM Plant has more than doubled its turnover in the last three years to €57m, securing several major contracts. During this period, it has secured Principal Contractor status and recently secured a four year framework contract to undertake track renewal on the Tyne & Wear Metro, which is operated by Nexus.
The management buyout was backed by leading mid-market private equity firm LDC for an undisclosed sum. The investment comes amidst the UK’s biggest ever period of investment in rail infrastructure, which includes major electrification schemes such as; Great Western, Thameslink, and Crossrail, Europe’s biggest construction project. Construction of the £56bn (€64bn) HS2 project is expected to start next year and Crossrail 2 recently received Government support.