Nick Elliott talks about funding for transactions such as a merger or acquisitions
Nick Elliott, Head of Major Corporate at Lloyds TSB Commercial Finance, comments on the use of asset-based lending (ABL) to fund private equity-backed buyouts:
“When carrying out a private equity-backed transaction such as a merger or acquisition, many businesses are unable to use funding from cash reserves alone and would often prefer not to relinquish equity or take on additional senior debt.
“Asset-based lending (ABL), which allows businesses to leverage both their current and fixed assets – including receivables, stock, plant & machinery and property – is increasingly being used as part of the private equity funding mix, as it strongly complements equity funding and other types of debt in these deal structures when the target company has significant tangible assets.
“By working in conjunction with the corporate finance community, ABL syndicates can be formed which generate significant funding to help push deals over the line. As part of the overall capital structure, it can offer a tailored solution for companies and transactions of all sizes, from domestic mid-market businesses to large multinationals with cross-border requirements.
“It is this scalability and adaptability that makes ABL so appealing in this context. For example, the management team and private equity house can unlock funding from a range of varying assets, including plant machinery, receivables and stock. In addition, for a multinational company, this finance can be raised against assets based in varying geographical regions, providing the funder has the requisite international reach.”
Case study
“In October 2010, Lloyds TSB Commercial Finance completed a private equity-backed cross-border transaction with the £75 million ABL refinancing of Chesapeake, a leading global supplier of consumer packaging. Having been acquired in May 2009 by two US-based private equity houses – Irving Place Capital (IPC) and Oaktree Capital Management (Oaktree) - Chesapeake became a privately-owned global business registered in the UK.
“At the time of the acquisition, the financial turmoil in the banking markets resulted in IPC and Oaktree opting not only to acquire the company with cash, but also to provide further monies to fund the day-to-day activities of the group. The use of a conventional third party lender was not practical at a time of severe credit compression in the markets. As lending conditions improved, IPC and Oaktree sought to refinance these loan facilities. Chesapeake is an international group with significant tangible assets and as such the choice was made to seek a cross-border ABL solution.
“The vast majority of the group’s manufacturing capability and customers are to be found in Europe with plants in the UK, the Republic of Ireland, France, Germany, Poland, Belgium and the Netherlands. That profile mirrors almost exactly our European footprint and our experience in providing innovative ABL solutions to major companies in those geographies. This helped us to secure the mandate to provide the cross-border funding solution.
“The Chesapeake transaction followed Lloyds TSB Commercial Finance’s first private equity backed cross-border deal, where it provided £26 million of ABL facilities to support the £52 million Rutland Partners-backed MBO of CeDo Group, the leading pan-European provider of disposable household products.
“Lloyds TSB Commercial Finance’s European team put in place a cross-border ABL facility comprising receivables finance in the UK, Germany and France, a UK stock finance facility and a loan against the plant and machinery at CeDo’s UK factory. The buyout was facilitated by a complex capital structure comprising not only private equity funding from Rutland Partners and a cross-border ABL package from Lloyds TSB Commercial Finance but also a mezzanine tranche provided by Indigo Capital. The transaction demonstrates that ABL has a place in the most complex of deals – cross-border funding as part of a multi-layered capital structure in a buyout situation.”