Asset-based lending could hit £1 billion

Private equity in the UK will be increasingly supported by asset-based lending, a financing technique that allows companies to borrow against their assets.

Today’s sale and leaseback by an Apax-led consortium of 21 UK hospital properties owned by Capio, a Swedish healthcare provider, is the latest example of private equity raising funds – £700 million in this case – by unlocking value from the tangible assets of portfolio companies.

Sainsbury: extensive property assets

The CVC-led consortium was hoping to use a similar trick with Sainsbury’s £7.5 billion property portfolio – reportedly set to be re-valued this week at £10 billion – until its bid ended in failure.

However, the number of firms looking for new ways of leveraging the assets of portfolio companies continues to increase, and banks are developing new financing techniques to match, according to a new group of asset-based lenders.

Its research estimates that 16 financial institutions in the UK between them have around £1 billion available for asset-based loans. This financing technique allows private equity firms to borrow money based on the value of a company’s balance sheet assets – particularly its machinery and equipment.

The technique’s main advantage is that banks are willing to lend more money to some businesses than they would under the traditional measure of cashflow. Furthermore, the debt is non-amortising and there are typically fewer financial covenants involved – making it more attractive to the borrower.

The method has so far proved popular in Europe within the manufacturing sector, but it has also been used in the US by supermarkets and other retail stores.
 
In the US, asset-based lending is already well-established. According to the Financial Times, asset-based lending accounted for $63 billion (€46 billion) of loans last year, up from $51 billion in 2004.

Now the influx of US private equity firms to the UK markets has increased the demand for asset-based lending there too. Unsurprisingly, American banks such as JP Morgan, Bank of America and Citibank have led the way with this form of lending, although Lloyds TSB has also been in the market for some time. ABN Amro is a more recent entrant, as is Icelandic bank Landsbanki.

JP Morgan’s Paul Hancock, speaking on behalf of the asset-based lending group, said that historically asset based lending has been used “as a technique for fast growth companies and for restructuring.”

However, it is becoming increasingly popular on the back of the recent boom in the mergers and acquisitions sector, fuelled by private equity’s appetite for deals. 

Hancock says the technique’s growth has been fuelled in the US by the covenant-lite approach, which has made it easier for borrowers to avoid defaulting on loans.

This situation has not yet been replicated in the UK. According to Hancock, until recently there were not enough lenders in the private equity market to provide the facility – hence the sudden growth now.

One notable recent UK private equity deal to have employed the technique was the acquisition of Peter Black by UK turnaround firm Endless last year, which had a multimillion pound financing package provided by Lloyds TSB