VideoFor Stephen Forsyth, 2001 was a one-two punch to the gut. In the spring, the CFO of Stamford, Connecticut-based Hexcel Corp. saw an unprecedented drop in the global electronics industry wipe out $100 million—two-thirds of the annual revenues from the composite-maker's electronics business. Then the terrorist attacks of September 11 decimated Hexcel's commercial aerospace business, slicing annual revenues there by $150 million, or 30 percent. In 10 months, the company, with annual revenues of $1.1 billion, had lost a quarter of a billion dollars, with little hope that the aerospace business would recover before 2006.
Forsyth's team quickly recapitalized the company, raising $125 million from private-equity sponsors, contingent on the company's ability to refinance its senior debt. To do so, Hexcel issued $125 million in senior secured notes and arranged a $115 million asset-based credit facility with Fleet Capital. "The equity investors wanted to be comfortable that we had structured senior debt that could take a few more bumps in the road," he says. "That's what took us to the ABL [asset-based lending] market in the final analysis."
A few years ago, ABL wouldn't have made investors comfortable; it would have sent them running for the exits. But this method of borrowing against balance-sheet assets—which long carried a stigma as "rescue" financing or "lending of last resort"—has since been legitimized, both by borrowers of Hexcel's size that value its flexibility and by an increasing number of very large companies that are boosting the size of ABL loans.
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Amount of asset-based loans outstanding (in $ billion)
In May 2001, CFO reported that the "stigma once associated with asset-based lending—that it signified a company down on its luck—has all but disappeared." That report focused on midsize companies—the traditional market for ABL loans ranging from $50 million to $100 million—that didn't have enough cash flow to get an unsecured loan. But as the economy sank further into recession—and some industries, such as retail, saw the worst deflation since the Great Depression—the number of large companies seeking credit from asset-based lenders soared. That, in turn, has made ABL a far more respectable proposition.
Of course, fallen angels (large, well-known companies whose bond ratings have slipped below investment grade) are down on their luck. But their names—and the size of the loans involved—have pushed ABL even further into the mainstream of borrowing alternatives. This year alone, Kmart, Goodyear, RiteAid, and Levi Strauss all took out asset-based loans worth well over a billion dollars each (see "Good Old-fashioned Debt" at the end of this article).
The typical ABL facility is a revolver, secured by liens against such working-capital assets as receivables and inventory. In recent years, arrangers have added term loans, secured by such fixed assets as property, plant, or equipment, to ABL packages. The Levi Strauss deal is one such example—the financing consists of a $650 million revolver coupled with a $500 million senior secured term loan.
What is not typical about Levi Strauss's financing is the size of the term loan. Smaller, more-traditional ABL offerings typically limit the term loan piece of an asset-based financing to no more than 25 to 30 percent of the size of the revolver. "[Term loans] were more discouraged in the past, simply because it was harder to predict what the ultimate value would be for equipment and real estate," notes Jim Connolly, president and CEO of Fleet Capital.
Asset-based lenders have long been experts at determining how much of a company's receivables or inventory they can recover in the event of a default, and the size of the revolver they offer fluctuates according to that "borrowing base." Moreover, a revolver secured by receivables is, in effect, a series of small loans paid down each time receivables are collected. It is more difficult for asset-based lenders to liquidate real estate or equipment, or even gauge what their liquidation values might be. "But," says Connolly, "we, the ABL industry, have gotten a little more sophisticated about calculating a company's ability to pay its term debt out of its cash flow."
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