Internationalisation of asset-based lending
April 2016 | TALKINGPOINT | BANKING & FINANCE
FW moderates a discussion on the internationalisation of asset-based lending between Alister Bazaz, head of international asset-based lending at Bank of America Merrill Lynch, and Bobbi Acord Noland, a partner at Parker Hudson Rainer & Dobbs LLP.
FW: Reflecting on asset-based lending (ABL) activity over the last 12-18 months, are companies demonstrating a strong desire to access this debt structure for cross-border transactions?
Bazaz: The growth of cross-border or global asset-based loans has increased significantly over the last 20 years, especially as middle-market companies are now accessing global markets to expand their sales or to take advantage of favourable economic and tax benefits overseas. The last 12 to 18 months has been a continuation of that trend at an accelerating rate.
Noland: Two reasons would seem to contribute to this trend. First, North American companies have been expanding globally and are seeking more certain access to funding such as an asset based loan. Second, the ABL marketplace has grown accustomed to incorporating foreign tranches into the overall loan facility. There are significant benefits to the North American chief financial officer managing a single global, multi-year facility, matching and simplifying currency issues, and integrating cash management.
FW: To what extent have cross-border ABL facilities offered to corporate borrowers changed over the years, by way of their general structure and terms?
Bazaz: It is not uncommon to see the foreign component of a global asset based loan be 50 percent of the total commitments. Recent developments have given borrowers the ability to reallocate quarterly line limits and availability among tranches, providing that they do not contravene Section 956 of the IRS code on deemed dividends.
Noland: The potential ABL-friendly countries for cross-border transactions have expanded over time. US lenders were comfortable initially with sub-limits, or separate lending tranches in Canada or England for foreign subsidiaries of US-based borrowers, but now the structures have expanded to include other countries, such as the Netherlands, Belgium, Australia and New Zealand.
FW: Could you outline the main advantages that an ABL can provide to U.S. borrowers with international operations who wish to expand their lending arrangements?
Bazaz: Over the last two years, US companies have recognised that annually renewable lines of credit or discretionary overdraft facilities which were very popular, due to being perceived as cheaper, were not stable sources of capital. Chief financial officers of companies now want certainty that funding will be there, which a five year ABL facility can do. Furthermore, they want the ability to move funds, integrate cash management, and have a consolidated working capital view with online platforms such as those available through BAML.
Noland: The access to increased borrowing availability that may be derived under an ABL structure from foreign operations and foreign assets, subject to the cost/benefit analysis in each jurisdiction, has become more attractive to borrowers. This is especially true as lending criteria in the US has become more stringent, and there has been less reliance on fixed assets in the borrowing base and real estate collateral.
FW: In what ways are ABL providers expanding their horizons across international markets? What challenges might arise during this process?
Bazaz: The global ABL lenders continue to try to meet client needs by exploring new techniques and new countries. The principal challenge is typically the legal framework, and, more importantly, the concern around judicial integrity within a particular country. Outside of North America, one is always playing ‘away’. Presently, the cross-border ABL product is available in the US, Canada, UK, Netherlands, Belgium, Germany, Ireland, Switzerland, Australia, New Zealand, Hong Kong and Singapore. There are a handful of additional countries which have been included as ‘accommodations’, and expansion of the ABL capability is deliberate and thoughtful.
Noland: The legal analysis is critical to a successful global asset based loan. Each jurisdiction will have its own specific limitations and challenges. For example, lenders may assume that all members of the European Union are favourable ABL jurisdictions, but that may not be the case. It is prudent to begin each cross-border ABL transaction by analysing a number of key points. Who owns the assets in the jurisdiction – a foreign subsidiary or a US-based company? Does the country allow security over the assets? What are the limitations in taking security? And, most importantly, even if the lenders can take security over the assets, can they realise on the assets if an event of default under the loan documents occurs? In the US, the mindset is to take a lien on all assets of the borrowers, to obtain cross-guarantees from all obligors and to rely on the rights and remedies of a secured creditor under applicable US law. This approach will not necessarily work when lending in non-US jurisdictions, and it is important to educate the entire legal and business deal team with respect to the nuances.
FW: What are some of the unique issues that lenders need to consider when structuring a cross-border ABL package, compared to a domestic facility?
Bazaz: Unlike North America, one needs to explore the legal entity structure that a company may be using. It is also important to consider the location of legal ownership of assets to determine whether the inventory in the same country as the owner, as well as the location of account debtors to determine where in the world the payments are coming from, and whether the local legal environment can support the financing.
Noland: In addition to the due diligence on the borrower’s operations internationally and analysing the legal structure of the financing, the lender itself will need to analyse its ability to participate in the cross-border facility. This is a key element that is often overlooked. The lender may have an international affiliate or branch that can lend in the specific jurisdiction, and is licensed to do so, but many potential lenders in cross-border transactions do not have separate lending affiliates or branches in foreign jurisdictions. As a result, they must analyse a number of questions with respect to their individual institution. Are they licensed to lend in the applicable jurisdiction or does the type of lending require a separate licence? Are any withholding taxes in the foreign jurisdiction applicable to the lender or is there an exemption? Can the lender lend in the applicable currency? Can the lender honour its cross-border funding obligations within the timeframe required under the loan documents?
FW: With ABL taking on an increasingly international flavour, how do financing techniques in general differ from country to country?
Bazaz: Some jurisdictions will allow the financing of all asset classes, and it may be advantageous to have a blanket lien on all assets in connection with insolvency proceedings in that jurisdiction – for example, the United Kingdom. Other jurisdictions, however, may require the satisfaction of criteria that is not practically feasible for a borrower. For example, local law in some jurisdictions may require the debtor to be dispossessed of the inventory in order for the lender to be perfected on it.
Noland: As a result of this, accounts receivable may be the only asset class that will provide increased availability to the borrower in that jurisdiction. Also, as noted above, some lenders may be restricted from lending to a foreign company if they are not licensed there, such as in Singapore.
FW: In your opinion, what does the future hold for ABL as a financing option internationally?
Bazaz: The market continues to expand rapidly, and we live in a global economy now. These are key ingredients for growth in this aspect of ABL financing. The cross-border ABL market, however, is still primarily initiated from North America as its companies have products and needs around the world, but more foreign country-initiated ABL transactions may develop over time. We also have found that more lenders are interested in participating in cross-border transactions, whether as a co-lender or an agent on behalf of a syndicate of lenders.
Noland: In addition, we have seen national and international trade and educational organisations sponsor more cross-border seminars in order to educate a broader group of potential lenders and legal counsel. Field examiners and appraisers also have expanded their knowledge base in the cross-border arena, and their analysis is important to lenders in order to understand foreign assets and country-specific borrowing bases and liquidation issues. Overall, the players in the ABL market place have shown a commitment to further expanding this attractive lending product for potential borrowers.
Alister Bazaz is a senior vice president for Bank of America Business Capital at Bank of America Merrill Lynch. He is head of international asset-based lending. Prior to joining the bank he had leadership roles with two major British global banks where he was Senior Vice President for Marketing to middle market and large corporate multinationals in the United States. He has a broad and deep variety of experience working with clients needing international credit, trade, and treasury solutions.
Bobbi Acord Noland is a partner at Parker Hudson Rainer & Dobbs LLP. For more than 27 years, Ms Noland has been engaged in structuring, negotiating and closing secured loan transactions for financial institutions, including international syndicated credit facilities. She is a Fellow of the American College of Commercial Finance Attorneys. She also has been recognised as one of the foremost banking lawyers in Georgia by Chambers USA in Banking and Finance and a leading banking practitioner by The Best Lawyers in America. She can be contacted on +1 (404) 420 5537 or by email: email@example.com.
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