Although Woolworths’ failure left asset-based lending with a hard- to-shake stigma in the UK, the Comet deal shows it is a perfectly viable form of funding.
Why are we talking about it now?
New Comet owner OpCapita has secured a £40m asset-based loan that will form part of the £120m to be invested as the struggling electricals retailer vies for survival.
What is asset-based lending?
Financiers lend against the assets of a business, which in retail generally means the stock it sells. Cash is lent based on a percentage, generally about 50%, of what lenders would get back from liquidated stock.
In what circumstances is asset-based lending used?
In the UK the method is most commonly used by retailers facing challenges.
“Stressed, rather than distressed,” is the terminology used to describe the typical borrower says Dennis Levine, chairman of Burdale, one of the most prominent lenders in the field. “It’s used when traditional methods of credit are not available.”
Isn’t asset-based lending associated with business failures such as Woolworths?
Woolworths borrowed against its assets – from Burdale in fact – but one lender says only about 15% of UK retailers that have accessed such funds have gone into administration.
Levine says that such borrowing does not signal a retailer’s farewell. He says: “That is not the aim. If a company is too distressed, we won’t go in. We buy into a turnaround plan – it must plan to survive for at least 12 months.” Burdale has lent against the assets of Jones Bootmaker and Mappin & Webb, among others, which have thrived.
Why isn’t it more widely used?
Asset-based lending is commonplace in the US and retail giants such as Saks and Toys R Us have accessed it. But the link with Woolworths in the UK has proved hard to shake off and such financing can therefore be stigmatised, unfairly according to some.
Alistair Lee, director at debt advisory firm GGW, thinks it is an effective revolving credit facility. However, it is more complicated than traditional financing, involving more stock monitoring and administration by retailers. Interest rates are also slightly higher according to Levine.
Is it becoming more common?
“Absolutely,” says Lee, who has seen the uptake of asset-based loans rise since banks have become more cautious. “It’s a well secured form of funding that lenders are happy with,” Lee maintains. “Retailers can secure more capital and it’s efficient for lenders. It’s a more disciplined form of lending.”