As companies look to expand internationally, many are turning to cross-border asset-based lending as a solution to help enhance liquidity and provide flexibility within their capital structures.
The growth of cross-border or global asset-based loans has increased significantly over the last 20 years, especially as middle-market companies are now accessing global markets to expand their sales or to take advantage of favourable economic and tax benefits overseas.
The principal challenge when raising A.B.F cross-border is typically the legal framework. Each jurisdiction will have its own specific limitations and challenges. For example, lenders may assume that all members of the European Union are favourable ABL jurisdictions, but that may not be the case.
It is prudent to begin each cross-border ABL transaction by analysing a number of key points.
- Who owns the assets in the jurisdiction – the foreign subsidiary or parent company?
- Does the country allow security over the assets?
- What are the limitations in taking security?
- Even if the lenders can take security over the assets, can they realise on the assets if an event of default under the loan documents occurs?
In the US for example, the mindset is to take a lien on all assets of the borrowers, to obtain cross-guarantees from all obligors and to rely on the rights and remedies of a secured creditor under applicable US law. This approach will not necessarily work when lending in foreign jurisdictions, and the same is true for the UK.
One needs to explore the legal entity structure that a company may be using. It is also important to consider the location of legal ownership of assets to determine whether the inventory is in the same country as the owner, as well as the location of account debtors to determine where in the world the payments are coming from, and whether the local legal environment can support the financing.
Lenders ability to participate
In addition to the due diligence on the borrower’s operations internationally and analysing the legal structure of the financing, the lender itself will need to analyse its ability to participate in the cross-border facility. This is a key element that is often overlooked. The lender may have an international affiliate or branch that can lend in the specific jurisdiction, and is licensed to do so, but many potential lenders in cross-border transactions do not have separate lending affiliates or branches in foreign jurisdictions. As a result, they must analyse a number of questions with respect to their individual institution.
- Are they licensed to lend in the applicable jurisdiction or does the type of lending require a separate licence?
- Are any withholding taxes in the foreign jurisdiction applicable to the lender or is there an exemption?
- Can the lender lend in the applicable currency?
- Can the lender honour its cross-border funding obligations within the timeframe required under the loan documents?
Financing techniques in general differ from country to country. Some jurisdictions will allow the financing of all asset classes, and it may be advantageous to have a blanket lien on all assets in connection with insolvency proceedings in that jurisdiction – for example, the United Kingdom.
Other jurisdictions, however, may require the satisfaction of criteria that is not practically feasible for a borrower. For example, local law in some jurisdictions may require the debtor to be dispossessed of the inventory in order for the lender to be perfected on it. As a result of this, accounts receivable may be the only asset class that will provide increased availability to the borrower in that jurisdiction. Also, as noted above, some lenders may be restricted from lending to a foreign company if they are not licensed there, such as in Singapore.
Future trends in Cross-border ABL
The market continues to expand rapidly, and we live in a global economy now. These are key ingredients for growth in this aspect of ABL financing. The cross-border ABL market, however, is still primarily initiated from North America as its companies have products and needs around the world, but UK and European initiated transactions are increasing rapidly.
More and more lenders are interested in participating in cross-border transactions, whether as a co-lender or an agent on behalf of a syndicate of lenders.
In addition, national and international trade and educational organisations are sponsoring more cross-border seminars in order to educate a broader group of potential lenders and legal counsel. Field examiners and appraisers also have expanded their knowledge base in the cross-border arena, and their analysis is important to lenders in order to understand foreign assets and country-specific borrowing bases and liquidation issues.
Article sources: JP Morgan, Financier Worldwide, Merrill Lynch, PHRD