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Global Business

Expand Your Horizons With Cross-Border Asset-Based Lending

As more US companies look to capitalize on overseas opportunities by expanding internationally, many are turning to cross-border asset-based lending as a solution to help enhance liquidity and provide flexibility within their capital structures.
John Goldthorpe, Head of Asset Based Lending, J.P. Morgan Commercial Banking
June 15, 2017

The increasingly globalized marketplace offers vast opportunities for business growth. With international expansion, however, comes added complexity, particularly in determining how best to finance a new or existing global presence. As more companies seek to expand overseas sales or capitalize on economic opportunities in other countries, US-based CFOs and treasurers are looking to cross-border asset-based lending as a way to finance those growth and expansion plans.

What Is an Asset-Based Loan? (hides following content on page)

An asset-based loan is a secured loan, typically a revolving line of credit. The borrowing capacity is determined by asset availability and calculated under a periodic borrowing base. This type of loan is focused on the borrower’s liquidity level (rather than other financial metrics), which enables greater flexibility for the borrower to invest cash where it’s needed to meet strategic goals and objectives.

Asset-based lending can be a flexible, cost-effective alternative to more traditional cash flow structures, which makes it appealing to a growing number of global businesses seeking to enhance liquidity and achieve structural efficiencies. Since the need for cross-border financing will only increase as the global economy offers more opportunity, there are a number of considerations business leaders should take into account when determining whether asset-based lending is the right solution to finance their companies’ next steps.

Growing Market for a Financing Alternative

Asset-based lending typically appeals to businesses that want to leverage their unencumbered asset base to enhance liquidity and realize a flexible alternative to more traditional cash flow transactions. It can help to improve financial controls within the company and reduce management time monitoring maintenance covenants. It can also provide funding for a range of activities, from growth-driven initiatives (like mergers and acquisitions) to strategy-led initiatives (like dividend recapitalizations and restructuring businesses).

To complement these many advantages, the asset-based lending market is healthy from a liquidity perspective. It’s more resilient in times of uncertainty, and as a result, doesn’t suffer from the volatility experienced in other debt markets, such as the term loan or high-yield space. Analysis from Thomson Reuters shows stability in the asset-based lending market since 2012. 2016 market volume was $76 billion, relatively in line with the 5-year historical average of $83 billion and the 5-year average quarterly volume of $20.9 billion.

ABL Regions Map

With asset-based loan volumes steady, the market for cross-border lending is active, particularly in North America, Europe and parts of Asia-Pacific, where more and more international businesses are looking for asset-based lending to finance their operations. In addition to North America, J.P. Morgan has provided asset-based lending facilities in Western Europe for over 10 years and has now extended that offering into Asia-Pacific to support a rising number of large corporations seeking a truly global offering.

Case Study: United Radio(hides following content on page)

United Radio, Inc., (trading as Bluestar in parts of the world) is a distributor of point-of-sale, automatic identification and data collection equipment. United Radio distributes more than 75 hardware and 25 software product lines to original equipment manufacturers such as Epson and Motorola.

Asset-based lending has assisted the company in growing its international operations. United Radio has significant business interests across Europe, and over time, J.P. Morgan has worked with the company to maximize the liquidity available through its revolving facility by centralizing invoicing from multiple European jurisdictions to one shared service center in the Netherlands. Doug Bivins, CEO of Bluestar, said, “We like the fact that we have a strong local team with J.P. Morgan, and that we also have international contacts at J.P. Morgan for very specific needs as they arise. Working with J.P. Morgan allowed us to conduct our banking operations seamlessly and on an international scale. They provided flexibility in the structure of our financing agreement, which has enabled us to conduct business without making significant changes to our business and our customers.”

The asset-based lending market is continually evolving to meet businesses’ international requirements, and at times that calls for expansion into markets not renowned for cross-border asset-based lending. A transaction recently closed in the marketplace in which all of the major global banks that offer asset-based lending --including J.P. Morgan -- are involved; this transaction demonstrates asset-based lending’s global appeal, as it offers direct financing to the company’s subsidiaries in North America, Europe and Asia-Pacific.

JPMorgan Chase’s 2017 Business Leaders Outlook report—which surveyed over a thousand middle market executives across a wide range of industries and US geographies—offers a unique insight into why the cross-border market is so strong right now.

This year, 56 percent of the midsized businesses surveyed have operations or sales outside the US. Similarly, among respondents that are currently globally active, 69 percent expect their overseas sales to increase in the next five years. And that’s likely because, as J.P. Morgan’s Head of International Banking noted, global expansion can be essential to helping businesses achieve growth, improve supply chain management and increase cost savings.

What Are the Advantages of Using Asset-Based Lending?

Multinational and international companies face complex challenges in coordinating and integrating a global business presence. Financing complexity can introduce inefficiencies and frustrate strategic growth. Some businesses face a decentralized financing structure with each subsidiary maintaining its own banking relationship and financing facilities, such as local overdraft lines, factoring facilities, trade facilities and bank credit lines. Another complicating factor is that subsidiaries may be borrowing in different currencies, and the various banking relationships may create restrictions on moving funds from subsidiaries to parent corporations, as well as moving those funds into the United States.

Advantages of Asset-Based Lending (hides following content on page)

 

  1. One credit agreement
  2. One bank group
  3. No ratings required
  4. No amortization typically, preserving liquidity
  5. Maximum restricted payment flexibility
  6. Minimal financial covenant constraints
  7. Works alongside other debt structures/financing
  8. Multicurrency borrowings

 

These diverse financing structures can be complex, and they limit an organization’s ability to optimize business on a global level. Asset-based lending can be an effective solution to these challenges by integrating the global treasury function with the credit requirements of these businesses. Additional efficiencies include one global credit facility, documented through one global credit agreement with one set of global terms, covenants and conditions. There’s also the inherent advantage of natural currency hedges created by directly matching borrowings with the denomination of the assets being funded.

Is Asset-Based Lending the Right Solution for Your Business?

There’s no one-size-fits-all solution for the myriad of strategic decisions in an international operation. Some business sectors, however, can enjoy significant advantages with asset-based lending. Commonly, borrowers that see the greatest benefit from asset-based lending are those with significant asset value (in the form of accounts receivable, inventory, or property, plant and equipment) and that:

  • Place value on the covenant and payment flexibility of an asset-based loan
  • Generate insufficient or too volatile cash flows to support a traditional cash-flow-type facility
  • Anticipate the need to fund a M&A or restructuring transaction

Sectors Best Suited to Asset-Based Lending (hides following content on page)

 

  • Cyclical industries (e.g., chemicals, metals, or building materials)
  • Seasonal industries (e.g. tourism, retailers, agricultural)
  • Industries requiring a significant volume of working capital (e.g. manufacturing or distribution)

 

The demand for more innovative cross-border structures is growing, and it is only expected to expand further as the needs of large multinationals become more complex. J.P. Morgan is well placed to adapt, innovate and react to those needs to be the banking partner of choice for corporations seeking growth outside of their traditional home markets.

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