Appetite returns for asset-backed borrowing

When credit was cheap, asset-based lending (ABL) was shunned for a time by certain cohorts of manufacturers, keen to avoid betting the farm when the cost of borrowing might become unaffordable. But some financiers say that ABL has always worked, if the needs of the business are correctly matched to the facility. John Jenkins runs GE Capital UK, which lends about £10bn to UK SMEs annually and is a corporate finance player with a strong track record in lending to manufacturers, especially the automotive sector.

TM: Is asset backed lending suitable for smaller companies?
“Although we don’t, with some forms of accounts receivable financing some lenders go right down to start-up companies. Trade finance, a technique we sometimes uses, can work well for small and early stage businesses. We tend to look at mid-market companies which are most suited to the ways we build solutions.

TM: Are mergers and acquisitions back?
Some private equity (PE) houses will say they were busy right through the recession. If you scratch that a little, you’ll probably find they didn’t do very much.
Activity falls into three brackets now. Firstly, you have more hands-on houses – Endless and Sun Capital Partners, for example – who actively look for opportunities that they can assist to the next stage of development. Other, more passive firms are looking to cycle portfolio, and we’re seeing a fair amount of secondary activity going through, e.g. on change of ownership. Finally you’re seeing global expansion business, where overseas companies are looking at UK companies as good acquisition targets. Here, weakness of sterling and the inertia in public capital markets are factors, where people are struggling get a return.
There is more optimism in M&A across Europe, we’re working on more private equity deals now than we were 12-months ago.

TM: British SMEs are largely family-owned and often shun private equity. When does that change?

I think it’s when you move from owner to manager. As you’re giving away part of your business it becomes slightly emotional. Once you break into the bigger end of the market where there is a more independent shareholding, they can often see the value in bringing in investment capital to enable them to grasp opportunities such as new markets, a form of acquisition of their own, investment in a new factory etc.
We’ve had some very nice stories where taking private equity was the shot in the arm that the business needed. To go out, and in some cases acquire a rival, who might have originally refused a merger, and in so doing consolidate into a much stronger business. But if you’ve built up a business over many years, the prospect of giving a chunk of it away is tough to swallow.
For example, family-owned Hanson Springs was exporting more and needed capital to support output growth. We did a deal recently with quilt and pillow makers Fogarty linked to a commodity cycle. They needed working capital because of the affect rising cotton prices were having on their business.

TM: Is it perhaps easier, or cheaper, for companies to finance against the value of assets now than 12-months ago?

The majority of financing we do is receivables, factoring and inventory, either lending or in the distribution finance business. These are near cash assets, they are predictable. If you export or import, there is some currency fluctuation but they are fairly stable assets. Some of the hard asset classes suffered a lot more, like commercial property, which saw a massive fall in value between 2008 and 2010.
If you are asset-based and the asset class is holding through, you’re able to be more forgiving on current financial performance than a cash flow, covenant based facility which suddenly sees performance crashing and all the triggers get flipped, which might point to reduce your exposure at the very time the business needs you to increase exposure. Having that predictable financing core really helped a lot of our customers get through 2009-2010 because their asset base held up.

TM: Are companies more or less willing to borrow against plant and capital machinery?
On new asset leasing, our appetite is as high as it has been. We’re up to 80% approval rates for SMEs wanting to invest in all forms of plant and machinery. Second-hand plant and machinery has suffered, it has been less predictable. Looking over the last 18-months and talking to auctioneers my sense is that values have hardened now. We closed a plant hire deal last week (early June) where we spent a great deal of time with auctioneers on asset value; now, 12-months ago and forward valuations, how values are moving on a range of yellow plant-type items. It has become more predictable.

You’ve helped finance Jaguar Land Rover, Triumph Motorcycles and car parts company IAC Group. Did the first help set up the others by association?
In fact, you tend not to pick up the deals further down if your customer is the prime. In the case of IAC, it probably helps that there is some association. Many of our lending opportunities come from accountants who secure these deals, who will recognise that we understand car manufacturing. Therefore it’s more likely that we understand the automotive supply chain and, for example, why there will forward commitment contracts, and minimum stock holding levels, and why they need to think today about what they will produce in 18-months time because there is a forward commitment under some sort of pricing contract. This applies equally to other sectors like aerospace and healthcare.

We recently debated how much we get out of being part of a manufacturing group. There are certain industries that we have a good insight into, but there are also certain mechanisms that we “get” because we [GE] are a manufacturer. We understand that the supply chain can be very, very long. And we apply Six Sigma to our financial processes.

Do you think the UK is an attractive place for large companies to come to, or are high energy costs, taxation and bureaucracy turning inward investment away?

I think we’re in a good place. Around the introduction of the euro, people said it would be the death-knell for any British manufacturer because no-one would invest, and we talked about relative wage costs. What it comes back to, is ‘Are we good at doing this?’ I think we are good at doing this. Attitudinally we’re better, where more factory workers understand there is no birthright to a job, that we have to work with management and customers and suppliers. People choose to use the UK not because we’re cheap but we understand this labour relations cycle better now. For how long that might overcome any future disadvantage is less clear. But some Indian and Chinese outsourced operations are becoming more and more expensive.