Intro content. Orci varius natoque penatibus et magnis dis parturient montes, nascetur ridiculus mus. Curabitur iaculis sapien sagittis, accumsan magna ut, blandit massa. Quisque vehicula leo lorem, a tincidunt eros tempor nec. In quis lacus vitae risus
egestas tincidunt. Phasellus nulla risus, sodales in purus non, euismod ultricies elit. Vestibulum mattis dolor non sem euismod interdum.
It is imperative for individuals to have a general idea about their future career aspirations, just as companies should have clearly defined strategies.
Editor's Note: SFNet spoke with the reporter and provided a substantial amount of data for this article.
Some finance chiefs under pressure from rising costs are switching to asset-based loans from cash-flow loans, bankers say.
More companies are borrowing against their assets, including inventory and receivables, as finance chiefs look to bolster liquidity amid financial stress from inflation and high interest rates.
Asset-based loans have a particular appeal for chief financial officers during periods of economic uncertainty. The draw: Companies don’t need to meet the same types of leverage and performance requirements included in loans based on a company’s cash flow. By pledging their assets, CFOs receive the comfort of knowing that a string of tough quarters or big investments won’t put them in hot water with their lenders.
Banks typically expect to see an uptick in borrowers shifting into asset-based loans from cash-flow loans when the economy is on shaky ground. Over the past year, an increasing number of companies have made the shift, according to commercial bankers and executives, who described the trend as notable though not at the scale of previous downturns. Companies in sectors including retail and consumer products are moving into asset-based loans because their profit margins are being squeezed by higher borrowing costs and persistent inflation, bankers said. Some also see an opportunity to borrow more against assets that are rising in value.
“We’re busier now than we were a year ago with internal transfers back and forth—mostly one way, toward us,” said Brent Hazzard, head of asset-based lending at Citizens Financial Group.
The company doesn’t break out the size of its asset-based lending business in its quarterly reporting.
“The rising interest rate pressure—the longer that goes on it does create pain points for companies and challenges, and we could see a greater migration from cash-flow to asset-based,” said Kurt Marsden, head of the asset-based lending business at
Asset-based loans provide an opportunity for banks to work with companies that are in a financial pinch. Some companies that take out asset-based loans ultimately move back to cash-flow loans, executives said. Nonbank lenders also provide asset-based loans.
Twin Rivers Paper, a privately held manufacturer of specialty paper used in products ranging from shopping bags to candy wrappers, switched to an asset-based loan from a cash-flow loan just over a year ago, according to Chief Financial Officer Tyler Rajeski. The company, which is profitable, wanted more freedom to make investments in its business without being bound by the covenants on its loan, said Rajeski, who also serves as president. Additionally, Madawaska, Maine-based Twin Rivers wanted to make sure it would continue to have liquidity in place in case of a slowdown, he said.
“The financial covenants on your cash flow loan can restrict you,” Rajeski said. He declined to share details about the size of the company’s loan, which it received from Citizens.
Demand for asset-based loans, once viewed as a last-ditch form of financing, has increased in recent years, propelled in part by the economic shock of the Covid-19 pandemic. Total asset-based lending commitments increased 9% in 2021 from a year earlier, to $456.8 billion, and an additional 10% last year, to $502.3 billion, according to the Secured Finance Network, a professional association for asset-based lenders. The association’s data includes both syndicated and non-syndicated deals.
Earlier this year, syndicated transactions volumes rose, in part because of a flurry of refinancing activity related to the transition away from the London interbank offered rate, but deal volumes have since come down. During the third quarter, asset-based loans that are syndicated across lenders fell to a total of $12.9 billion from $51.3 billion during the previous quarter, and $46.5 billion a year earlier, according a division of the London Stock Exchange Group that tracks lending data. The sharp decline was largely due to an earlier push by borrowers to refinance their loans with the Secured Overnight Financing Rate, U.S. regulators’ preferred alternative to Libor, LSEG said. The quarterly data largely includes deals worth at least $35 million.
While asset-based loans provide borrowers with more flexibility, they also come with higher compliance costs. Borrowers provide lenders with regular reports and agree to periodic inspections to help banks assess the value of the collateral. Companies are often required to meet a minimum liquidity threshold, or stay under a certain borrowing level, before additional restrictions apply.
Borrowers are looking to strengthen their balance sheets as financial forecasting remains difficult, said Ryan Mulcunry, a managing director at the financial services firm B. Riley Financial, describing a recent increase in deal activity, attributable in part to companies switching to asset-based loans from cash-flow loans. The firm, which offers appraisal services for lenders, is expanding its staff of asset-based lending appraisers by between 15% and 20%, in response to higher demand, Mulcunry said. It currently has about 200 appraisers on staff.
“We’re in a world where additional liquidity is very important,” he said.
.jpg?sfvrsn=f1093d2a_0 "#3 -_ 1 (1)")
