1. Asset Based Financing - Gaining
Popularity in the Middle East
Asset-based Financing provides a powerful
financing solution for midsized and larger
companies that seek to maximize the value
of their assets, achieve greater liquidity and
pursue new growth opportunities.
Once considered financing of last resort,
asset-based lending has become a popular
choice for companies that do not have the
credit rating or track record to qualify for
more traditional types of financing. It has
expanded its global reach from North
America to include UK, Europe, Australia,
South East Asia and Middle East. Sponsors
have become increasingly aware that ABL
offers significant benefits when compared
to cash-flow financing, including lower cost
and greater flexibility.
Understanding Asset-based financing
Asset-based financing is a form of secured
lending that is based primarily on the
quality, value and adequacy of the collateral
that an issuer pledges. In general terms,
asset-based lending is any kind of
borrowing secured by an asset of the
company. Asset-based lenders focus on the
quality of collateral rather than on credit
ratings.
Broadly, the following categories of assets
are pledged by the borrowers:
 Accounts Receivables
 Inventory
 Equipment (Plant & Machinery)
 Property / Real Estate
Accounts receivable and inventory - assets
that have a high degree of market liquidity
and can be easily valued and monitored -
head the list of qualifying assets. Long-term
assets such as equipment and real estate
are often used as additional collateral when
the Asset Based Loan (ABL) is structured as
a term loan with a fixed amortization
schedule.
Typical ABL credit facilities may include a
revolving line of credit used to support
working capital needs and possibly a term
loan to provide availability against longer-
term assets, such as machinery and real
estate. It can also include capex facilities to
provide financing for capital expenditures.

2. Applications of ABL
ABLs can benefit both midsized and larger
companies. For higher quality, large-
corporate borrowers, ABLs are often used
simply for financing working capital. These
companies use ABLs to fund seasonal
changes in working capital, for shareholder
value-creating actions such as share
repurchase programs, dividends or
distributions, and for opportunistic
acquisitions.
For midsized companies, ABLs usually
comprise a larger proportion of overall
capital structure. Here, in addition to
providing working capital financing, ABLs
often incorporate term loans, which are
secured by longer-term assets such as
machinery and real estate, to provide
incremental credit capacity.
Acquisitive companies use ABLs as part of
their acquisition financing structures, which
may also incorporate other forms of junior
capital.
ABLs also tend to play a key role in the
financing of companies facing cyclical or
operating performance headwinds that
have caused their credit profile to
deteriorate. They need patient capital to
attempt to execute on their business
turnaround or restructuring plans, or just to
weather the current environment, including
the possibility of bankruptcy reorganization.
Often, an ABL is “transitional” capital for
these companies; for a time it provides
incremental liquidity and structural
flexibility characteristics that help owners
and managers reposition the company.
ABL Growth
One of ABL’s key benefits in recent years
has been its competitive pricing. The
interest cost of an asset-based loan can be
significantly less than a traditional bank
loan. As lenders are advancing against a
company’s most liquid assets that have a
readily identifiable value, their ultimate
credit risk is lower.

3. ABL has long been a key feature of the US
loan landscape; however, Europe, including
UK, and the Middle East are catching up.
The ABL market in UK is growing rapidly as
awareness of ABL as a funding proposition
increases. The level of assets financed has
increased by 41% since 2009, to £18.8 bn in
2015.
At sector level, manufacturing is often cited
as an industry ideally placed to benefit from
ABL, alongside sectors such as distribution
and support services. According to the
latest ABFA figures, of the clients making
use of ABL, 12,915 were in the service
sector, 12,651 in manufacturing, and
10,742in distribution.
Underlying and supporting ABL growth is
greater understanding and acceptance
among corporates, private equity and
advisers. Asset-based lenders have
successfully targeted advisers and private
equity which has led to an increased
number of sponsor deals. This upward
trend is likely to continue as the market
further appreciates the benefits of ABL.
Popularity in Middle East
Asset based finance is a popular method of
obtaining bank finance in the Middle East. It
is being offered by most local banks and is
particularly popular in the real estate
market. With increasing market prices and
reduced interest rates, ABL has become a
favored source for obtaining finance by
companies with substantial assets.
Manufacturers, wholesale distributors,
retailers, and some forms of service
companies are prime candidates for ABLs.
Suitable ABL candidates usually have
tangible asset-rich balance sheets, often
with at least half of their total assets in
working capital assets, such as accounts
receivable and inventory.
Recent fall in oil prices has tightened the
credit situation in the Middle East which
had not fully recovered from the Global
Crisis of 2008. This has resulted in an
increased interest in alternate financing
methods like ABL. Following are some of
the key requirements for which ME based
companies are looking at ABL as the
preferred method of generating finance.
Cash Flow Injection
In ABL transactions, the lender’s interest is
secured by the borrower’s assets, which
then forms the basis for determining how
much credit the borrower can access. In
contrast, the cash flow method of
determining credit capacity is principally
based on an analysis of the borrower’s
enterprise value.
Cash flow-based loans, while also usually a
secured form of financing, often use EBITDA
(or a company’s earnings before interest,
taxes, depreciation and amortization) along
with a multiplier to determine credit
capacity, rather than the value of the
underlying collateral assets. Both the level
of EBITDA and the multiplier applied can
change significantly during business and

4. economic cycles. During an economic
downturn, most companies will see their
EBITDA decline, both on a relative and
absolute basis. Often, the multiplier being
used by lenders will shrink at the same
time. This combination of declining EBITDA
and a shrinking multiplier can result in a
significant decline in available credit
capacity at what could be the exact time a
company needs access to capital the most.
This is the exact situation many companies
in ME face today in the wake of the oil price
crisis.
In contrast, the valuation of a borrower’s
assets is remarkably stable over a variety of
business and economic cycles. This makes
calculating a borrower’s credit capacity
based on asset values a highly predictable
way of providing capital to clients. For these
reasons, ABLs are the preferred of lending
for cash-strapped companies in ME, than
cash flow-based loans.
Increased Flexibility
Companies benefit from the limited use of
financial covenants and the embedded
broader flexibility built into negative
covenants. When a company moves from a
cash flow loan structure to an asset-based
loan structure, it sheds the restrictive
enterprise value-driven covenants under
the former. Often, it will see its liquidity
increase while being able to operate with
fewer (if any) financial covenants. This
provides significant flexibility to make
acquisitions, offer dividends and repurchase
shares.
The power of asset-based approach to
lending is its ability to look beyond the
current circumstances facing a company,
particularly if those circumstances have
made the business unprofitable, and to find
value in the investments the company
makes in the ordinary course of conducting
its business.
Speed
Asset based financing is a relatively quick
method of accessing cash in cases of
emergency or as a method to fund
expansion. Companies which are planning
major strategic changes, like expansion into
overseas markets, product R&D and
innovation, upscaling payrolls or structured
M&A activity, can resort to the ‘quick
money’ influx method of Asset Refinancing.
With refinancing, the business can continue
to use the asset without any interruption in
operation. The company sells an asset to
the leasing company for the current value,
which then leases it back.
Limitations and mitigation
The assets owned by a business change
daily. New sales are recorded as new
accounts receivable and existing accounts
receivable (old sales) are collected in cash.
Inventory is both purchased and sold. Some
inventory is converted from one state to
another, such as from raw materials to

5. work-in-process, or to multiple states within
a day. The composition, quality and value
can change quickly, and these changes are
not always reflected in the periodic financial
statements a company may publish.
Since an ABL is based on these kinds of
assets, lenders need a different kind of
information to be able to adequately
monitor and gauge these changes in the
collateral base. They require periodic
reporting, such as accounts receivable
aging, and inventory composition and
valuation reports. ABL borrowers provide
this kind of reporting along with their
periodic borrowing base certificates —
which recognizes the changes in these asset
classes from period to period — in addition
to the usual and customary financial
statement reporting. The frequency with
which a borrower has to provide this
information is usually a function of its credit
profile and the amount of unused loan
availability. Stronger credit profiles with
abundant liquidity generally report
monthly. As credit profiles decline and/or as
liquidity becomes more constrained, the
frequency of reporting would be increased
to weekly. In extreme situations, borrowers
can be required to report changes in
accounts receivable and inventories on a
daily basis.
To reduce the reporting burden on
borrowers, Asset based lenders need to
invest in software and processes for
reporting, determining ineligible collateral
and uploading information. These
technological advances substantially
mitigate the one significant drawback of
ABL.
Nucleus Software offers solutions and
services that help financial institutions
manage ABLs reducing the overheads for
the institution and easing the pain for the
borrowers.
Conclusion
Asset based financing boosts business cash
flow by releasing cash against the value of a
company’s existing assets. It provides a
convenient form of cash supply as assets
are used to free up the capital a company
already owns. The cash that asset refinance
generates can be reinvested into further
asset growth. A structured refinance plan
can help the company grow, take advantage
of a situation or simply help survival.
The growth of ABL in Middle East has been
impressive in recent years and this growth
only appears to be accelerating. ABL
facilities have been used in Middle East
across a broad number of industries
including retail, construction and shipping
and have proven to benefit both mid-sized
and larger companies. The flexibility of the
ABL product and its unique ability to
operate across borders makes it very
attractive in today’s global business world
of where corporate borrowers have
business interests across many different
jurisdictions and where the world is their
marketplace.

6. Authors
Arup Das
Lending Product Head (P&L Management), Nucleus Software
Arup is the Vice President and Lending Product Head (P&L
Management) at Nucleus Software where he is responsible to lead the
flagship product to the next level of global leadership. Before joining
Nucleus, he has played various roles in strategy and product
management with leading companies like CISCO, IPValue and Mphasis.
Author e-mail id: arup.das@nucleussoftware.com
Vaibhav Gupta
Senior Product Manager, Nucleus Software
Vaibhav is a Product Manager at Nucleus Software where he is
responsible for managing P&L for FinnOne Neo for Cloud and Middle
East. He has previously worked on Cisco Solutions and was responsible
for product strategy, go-to-market initiatives and licensing operations
within the Unified Communications offerings.
Author e-mail id: vaibhav.gupta@nucleussoftware.com