How committed are asset based lending arrangements?

There are varying degrees of commitment within asset based lending arrangements, depending on a wide range of factors including the funder's house position or the credit strength of a borrower. When facilities are described as committed, this generally refers to a more semi-committed style arrangement. By this, we mean that the funder retains an element of control to determine how available a facility will be for their borrower. This control may be given to a funder through various levers in the documentation, such as:

• giving the funder the ability to designate receivables, inventory and/or the P&M as ineligible, therefore limiting the assets that can be used by a borrower to obtain funding
• allowing the funder the discretion to apply reserves against the various facilities, thereby reducing availability under those facilities
• letting the funder unilaterally change the various limits that may apply to the relevant facilities
• giving the funder the ability to require the borrower to repurchase its receivables by way of recourse rights
• allowing a funder to terminate the arrangements with little or limited notice to the borrower, essentially making the facility 'on demand' in nature

One point often raised alongside the extent of the commitment of a facility is the type of fees that should be charged to a borrower. The general view is that commitment fees should not be charged, given that the arrangements are not fully committed. There is also often a discussion about how easily triggered early termination fees should be, given the discretion of a funder to be able to terminate the arrangements.

What can be done to address commitment concerns in an asset based lending relationship?

The nature of an asset based lending facility is such that a funder will always look to retain an element of control in determining the funding available to a borrower. However:

• trust and good communication between the parties is key - regular interaction between the funder and the borrower throughout the life of the facilities will reduce the risk of unilateral actions being taken by a funder   
• discretion can be limited, depending on the commercial agreement between the parties
• from a borrower's perspective, understanding headroom is crucial, to allow for a buffer should availability be reduced
• if certain funds are required for an acquisition, thinking about pre-funding ahead of completion can alleviate concerns
• it is not in a funder's interest to limit the availability of a facility unless there is a genuine reason for doing so

Discussing at the outset of a transaction what the expectations are with regards to commitment will go a long way to addressing concerns, minimising the risk of additional negotiations and facilitating a more harmonious relationship between the parties.

Ultimately, how 'committed' a facility is depends on the extent of the discretion given to a funder through the various rights in the documentation. In some cases, the discretion is restricted considerably so that a funder is limited to certain key controls; in other facilities this discretion is more wide reaching. Whilst the semi-committed nature of asset based lending can at first be difficult to comprehend, the reality is that the arrangements still provide a sufficiently high level of certainty of funds, to provide a borrower with a very credible funding proposition.

Please feel free to reach out to one of the key contacts or your usual contact within Addleshaw Goddard if you would like to discuss any points raised in this article.