1. Single Use Only
Reprinted from the April 2008 Issue, Vol. 6, No. 4
©2008 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.
Climate Change
The Current Market for Cross-Border
Asset-Based Finance
As the credit crunch continues to bite on both sides of the Atlantic, businesses are increasingly focusing on their asset
base as an alternative source of stable funding. Certainly, the current market conditions have created a much more
favorable climate for asset-based financiers than for traditional cash-flow lenders.
By Graham Wedlake
W
hile there is still nervousness about financing for private
equity or sponsor driven deals, the outlook for refinancings,
particularly in the European market, appears more positive.
Borrowers having to negotiate a refinancing of their facilities, against a
backdrop of the current tight market conditions and a lack of liquidity, have
found banks not only less sympathetic to requests for covenant relaxations,
but also tougher on the margins that they expect for providing them.
ABL as a Mainstream Alternative
As a result, asset-based finance is becoming a realistic alternative to
mainstream lending for finance directors, not only in terms of its day-to-
day flexibility but also in the context of its increasingly competitive cost.
The ability of asset-based finance to offer leverage against assets, not
just in traditional creditor-friendly countries such as the U.S. and the UK,
but also against assets in continental Europe and other jurisdictions such
as Ireland, has increased the pool of assets available both for primary
security and as boot collateral. In turn, this has enabled lenders to offer
a greater level of stretch for the overall enterprise value.
In addition, these facilities are now often being wrapped in more
recognized loan-market standard documentation. The confidence that this
engenders that larger deals can be done in the ABL market with a more
flexible means of syndication (i.e., not simply by way of risk participa-
tion) has increased liquidity and also means that asset-based financiers
are setting their sights higher. Within the U.S., what was once primarily
a financing solution for middle-market companies is now being accessed
by much larger companies. There are a number of recent examples of
facilities in excess of $1 billion, including a $4 billion syndicated ABL
facility for Sears Holdings Corporation.
Financiers in the capital markets are beginning to understand how best
to marry the securitization or larger leveraged loan structures with which
they are familiar with the stronger covenant and monitoring requirements
that are required when providing an asset-based finance solution. Over
time, this should lead to a level of standardization and familiarity, which
can only be good for the growth of the market.
Further recognition of the maturity of the asset-based finance market
is the attention it is now receiving from the rating agencies. In January
2008, Moody’s announced changes it was making to differentiate the
favorable recovery experience of asset-based loans relative to other types
of secured first lien loans. In most cases, this will result in a one-notch
upgrade to well-structured ABL facilities compared to the ratings suggested
by Moody’s current methodology.
So the background is positive and the time is right for increasing
use of these types of facilities. What then are some of the other hurdles
that have to be overcome so that, what has for a long time been an
established component of the U.S. financial markets, can develop more
strongly outside its domestic borders?
Challenges to the Growth of the Market
The challenges to the growth of the market come from a combination of
legal and commercial issues. They require both an understanding of the
legal and cultural environment in which these facilities have to operate
outside the U.S. plus a set of touchstones to ensure that problems are
seen in their context. While the reduced transparency and predictability
of security and quasi-security are all concerns for lenders having their first
experience of dealings in Europe, it has to be remembered that there are a
number of very large banks in Europe providing domestic and cross-border
finance within Europe that are entirely comfortable with the environment
in which they operate.
The advantage for asset-based financiers is that they do have the
ability, through the life of their facilities, to adapt advance rates, levels
Financiers in the capital markets are
beginning to understand how best to marry
the securitization or larger leveraged loan
structures with which they are familiar
with the stronger covenant and monitoring
requirements that are required when
providing an asset-based finance solution.

2. Single Use Only
©2008 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.
of reserves and eligibility criteria to match their experience with their
customer and their level of comfort with the legal environment in which
it operates.
Understanding and managing legal risk, therefore, is one of the key
issues that U.S. asset-based financiers embarking on this journey need
to address. What is perhaps more difficult, however, is quantifying the
often intangible cultural issues that need to be managed when dealing
with these transactions as a whole. A particular challenge is corralling
the input of a wider range of participants in a number of jurisdictions
that may not necessarily be familiar either with the product or the way
in which financing transactions are conducted in the United States, in
order to deliver a cohesive cross-border solution.
Some of the Legal Issues
Some of the key differences between the U.S. and the UK as against other
European jurisdictions are:
After-acquired property
It is often difficult to obtain security over after-acquired property
without significant further effort or paperwork. Where assets are continu-
ally changing, such as with accounts receivable, it is often necessary to
update the details in the security document to record the actual assets
that are being secured.
Registration
The U.S. and the UK have advanced systems for the filing and
registration of security interests, and searches can be made on public
registers before committing to a financing. This is not always the case
in continental European jurisdictions.
Formalities
In the U.S. and the UK, the requirements for formalization are extremely
limited. In effect they are confined to registering the security interest at a
public register and paying the filing fees (usually nominal). In most conti-
nental European jurisdictions, however, many security documents must be
notarized and the notarization fees can be substantial — they are often
linked to the value of the underlying asset.
Inventory and Equipment
Outside the UK, there are a number of practical difficulties that get in
the way of taking effecting security over assets such as inventory or plant
and equipment while those assets remain in the borrower’s possession.
Guarantees
Upstream guarantees, particularly from companies incorporated in
continental European jurisdictions, create a number of issues. Often they
will not be valid unless limited to the net asset value of the guaranteeing
company, and even then directors are reluctant to authorize such guar-
antees for fear of possible personal liability.
Self-Help Remedies
In both the U.S. and the UK the security holder can usually take
steps itself to enforce its security. This is rare in the rest of Europe where
security enforcement and asset realization are usually by means of a
public auction or court-driven sale process.
Other Stakeholders
Cultural priorities often dictate which stakeholders’ interests should
be paramount on any insolvency. In the UK, it still tends to be the senior
secured creditor whereas in continental European jurisdictions, particu-
larly France, protecting the interests of groups such as employees will
be the main priority.
Retention of Title snd Hidden Liens
In the United States, retention of title (or consignment liens) can be
protected by registration under the UCC. This is not the case in the UK
or in most, if not all, of continental Europe. There are also differences
within Europe as to whether such inventory, when sold, creates a valid
account receivable. Broadly speaking, it will do so in the UK but will not
in many European jurisdictions, particularly Germany.
Practical Ideas for Overcoming the Issues
Collaboration and Identifying Issues Early
Whenever embarking on a deal that involves a jurisdiction outside
the U.S., it is essential that both borrowers and lenders collaborate if
the deal is to be delivered on time and as expected.
Structuring the deal properly and making sure that any potential
pitfalls are identified early is absolutely key. It is often worth the invest-
ment in time (and even travel) to have a physical all-parties meeting
early on so as to emphasize the need for a common strategy and purpose
and to reach agreement on how to address potential deal breakers. For
instance, there is little point in offering a confidential facility to the
borrower only to find that it is either not possible in the jurisdiction that
you are considering or that the costs of doing so are prohibitive.
Wherever possible, documentation should be standardized (a common
form of guarantee across multiple jurisdictions can often save time) and
it needs to be established early on where is the likely focal point for any
insolvency process. In Europe, where a company has its center of main
interests is key in establishing where the primary insolvency proceedings
would be initiated. This, in turn, could have a significant effect on priority
issues and which creditors might come out ahead of the lender.
What Laws Are Relevant and Are You Pushing
the Boundaries?
While it may be obvious, it needs to be remembered that Europe is
not one country (each jurisdiction has its own laws even though they
may derive from the same civil law system). Even common law countries
have different laws. For instance, the way in which security is taken over
accounts receivable in England is quite different from Scotland. In prac-
tice, it is not possible to do confidential invoice discounting in Scotland
whereas it is the norm in England. Parties to cross-border deals also
need to recognize that the deal may be pushing local law boundaries and
that those who are managing the legal process may well be operating
outside their comfort zone.
Making Yourself Understood
This is important, not just in the sense of expressing yourself clearly, but
also of being aware that, even if you do, you may well still be misunderstood.
For instance, if you ask for a mortgage in Germany, you will probably get one —
only to be disappointed that it does not secure anything other than the
debt that was originally secured. You should have in fact asked for a
land charge, which would have been capable of securing new debts. The
motto is that you should not only ask for the security by name but also
describe how you expect it to function. Also the same words can have
In the current climate, the stretch that
asset-based finance can bring and the
extra leverage that can be created could
well mean the difference between a deal
being done and not being done.

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©2008 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.
different meanings. For instance, is stock part of the company’s equity
capital or simply its inventory?
Timing Is Everything
If you really mean a deadline that is tomorrow, it is better
to specify the date and time rather than simply tomorrow —
that could be interpreted as any day that is after today. Remember too that
third parties are not on your timetable. Landlords who are required to give
consents or insurance companies that are to endorse insurance policies
or banks that are to release existing security are rarely incentivized to do
what is required. This is of course true of purely domestic transactions.
However, in a cross-border context, when things such as releases require
to be notarized, these problems can be seriously compounded. Beware
also of public holidays — these can celebrate the same event but be on
different days in different jurisdictions.
It is often helpful, therefore, to identify who is to be the legal gate-
keeper outside the U.S. for your transaction — it needs to be someone
who is close to the time zones that you are dealing with to ensure that
you maximize the available contact time but who is also familiar with your
way of working and can therefore manage expectations on both sides.
Time differences can be a positive though. With U.S./Europe deals, they
can often work to the advantage of U.S. financiers who can expect, if
they give clear instructions overnight, to have something on their desk
when they come in the following day.
The Great Leap Forward
This is a market that could very well be poised to take a significant leap
forward. Customers are becoming increasingly familiar with the ABL product
and are beginning to understand the benefits that can go with the some-
times painful disciplines of getting their reporting and monitoring up to
scratch. They can also see the benefit of dealing with lenders that place less
reliance on financial covenants and that can provide finance that can expand
not only with the growth of the asset base but also with their familiarity with
the customer.
In the current climate, the stretch that asset-based finance can bring
and the extra leverage that can be created could well mean the difference
between a deal being done and not being done. Opportunities may well
arise for some form of equity or warrant if the increased leverage that the
ABL solution makes available reduces the need for outside private equity
money, thereby enhancing the asset-based financier’s overall return.
These opportunities are more likely to arise in new markets where
there is perhaps less familiarity with ABL as an alternative financing
product, but also less competition. In order to access these new markets
there is, as with any step forward, learning to be done both in terms of
approach and in correctly analyzing the level of risk.
What is clear is that this is an industry that is in a growth phase in
relation to cross-border deals and that there is more and more knowledge
and familiarity among the participants that is enabling risk to be better
evaluated. The rewards are there for the bold but well informed. A little
bit like life, then. abfJ
Graham Wedlake is a finance partner at the European law firm of Taylor
Wessing. For more information please contact Wedlake at g.wedlake@tay-
lorwessing.com or visit www.taylorwessing.com.