Ryan Birnel, BOK Financial’s® director of Asset Based Lending, recently walked us through the basics of this alternative financing option for commercial borrowers.
What is Asset Based Lending?
Birnel: Asset Based Lending, or ABL, is a method of providing flexible financing for commercial borrowers through a focus on the borrower’s working capital assets. Where conventional commercial lending typically prioritizes cash flow first and collateral coverage second, ABL flips the script, underwriting the collateral first.
Since it’s hyper-focused on collateral, ABL is substantially less sensitive to traditional cash flow metrics.
How does ABL work?
Birnel: The heart of an ABL structure is a revolving line of credit with two key features:
- Dynamic availability based on a closely-monitored borrowing base
- And cash dominion (a treasury account structure that requires the borrower’s incoming cash be aggregated into a single account that the lender can control).
We take a hard look at the liquidation value of the collateral, combined with the cash dominion arrangement, to create a mutually beneficial, risk-reduced relationship, because the bank cannot lend more than what it would recover in a liquidation and incoming funds are swept daily.
Why is Asset Based Lending an attractive option in today’s environment?
Birnel: ABL financing is red hot, and here’s why.
It’s an appealing option when you factor in the current ambiguity of operating in a post-pandemic environment, characterized by disrupted supply chains, radically altered consumer behavior, large swings in certain commodity prices, and a general contraction in economic activity.
CEOs and CFOs are more willing than ever to trade the elevated collateral reporting requirements that come with an ABL structure for the increased operating flexibility.
For these reasons, ABL is often referred to as a situational lender. We tend to partner in two situations:
In transition. Companies that are facing challenges in their industry, pursuing a turnaround or looking to restructure often look to ABL for its flexibility. These companies are often transitioning from a conventional/cash flow lending structure and may have defaulted on covenants.
Weaker operating performance may be tied to cyclical pressures or exposure to commodity values that have swung in an unfavorable direction. For companies with good assets, ABL can be a viable refinancing option, and can, in some cases, provide greater access to capital with more flexibility in terms of covenants and performance expectations.
Pursuing growth. Businesses looking to grow capital often look to ABL as a source of senior financing. ABL can structure a solution for borrowers that are focusing on top-line growth versus bottom-line profitability.
The ABL team works with sponsor-owned (private equity/family office/investor group) borrowers who typically employ growth strategies of acquiring competitors, developing new product lines, pursuing new geographic markets, etc. These situations often have higher-leverage characteristics and complex capital structures. ABL is also used to support leveraged buyouts and dividend recapitalizations.
What businesses or industries are the best fit for Asset Based Lending?
Birnel: ABL works best with asset-rich companies that deliver a tangible product to customers. ABL is more challenging for service-oriented companies. Our most common ABL client industries include:
- Food and beverage
- Retail (including e-commerce)
Why partner with BOK Financial?
Birnel: Obviously, I think our ABL bankers are top-notch in this area, with broad experience across multiple business cycles, industries and company sizes. But what differentiates us is how we cover client relationships. We partner with local commercial and corporate relationship managers. This allows us to know our clients personally and provide the best service.
Learn more about ABL here.