Mining the Balance Sheet

Asset-based loans are an increasingly attractive alternative to bank financing, and not just for those who can't borrow against cash flow.

“We foresaw a little bit of weakening in the economy, which meant a window of opportunity,” says John Goldthorpe, an executive vice president at Heller Corporate Finance. Industrial conglomerate Tyco International sees so much potential here that it announced plans in early March to buy The CIT Group, a New York­based commercial finance company, in a deal initially valued at $9.2 billion.

To be sure, troubled companies still account for most of the demand. CIT says that 80 percent of its new business involves debt restructurings, compared with 50 percent a year ago. Not surprisingly, this demand is greatest in the industries experiencing the most stress — specifically, retail, telecommunications, technology, and media.

But asset-based lending is also attracting young growth companies that don’t have a long enough history with a bank to get an unsecured loan, especially in a tight credit market. Case in point: CLP Resources Inc., a Reno, Nevada-based staffing services firm. CLP has more than doubled in size since the late 1990s, to $114 million in revenues last year, and has been pumping profits into working capital to fuel growth. Last November, the company needed to borrow to acquire another temporary-staffing firm. It was able to get a $25 million, three-year facility from Fleet Capital Corp., a unit of Fleet Financial, that was not as restrictive as some asset-based loans in that it allows the company to control its cash accounts, says executive vice president and CFO Bud Little.

While most borrowers are small and midsize companies, large, cash-starved companies have become a definite presence in the market, borrowing $250 million and more at a shot. For example, the $800 million that U.S. retailer Ames Department Stores Inc. recently secured in senior secured financing from General Electric Capital Corp., the finance arm of General Electric Corp., is backed by its inventory, receivables, and real estate. Xerox Corp., struggling to reduce a crushing debt load, is another example, having received $435 million in 18-month financing, also from GE Capital, against the company’s U.K. portfolio of lease receivables.

The Kitchen Sink?

Meanwhile, the types of assets that serve as collateral have multiplied. Back in the 1970s, asset-based loans were limited to receivables. Today, anything on the balance sheet qualifies, including inventories, machinery and equipment, real estate, product lines, brands, technological processes, and patents. Lenders prefer to lend against the most liquid assets — receivables and inventory — first, and most asset-based loans are revolving loans backed by those assets. Equipment and property serve as collateral for term loans. Commonly, loans are part revolver and part term. That’s what Circuit-Wise Corp., a North Haven, Connecticut, manufacturer of printed wiring boards, has in its $12 million credit line with CIT, which includes a $2 million equipment-backed term loan.

Even though asset-based loans are fully secured, lenders do consider operational issues when deciding whether to lend, and those issues are more important than ever. In contrast to the last recession, when debt restructurings were often all that were needed to turn red ink into black, today many troubled companies not only are highly leveraged but also have unpredictable and typically sagging revenues. “The degree of risk today is different,” says Lawrence A. Marciello, group CEO of CIT Commercial Finance. “We really have to buy in on management’s execution plan within adverse business conditions.”


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