Asset-based lenders provide loans secured against current assets such as inventory and accounts receivable, and fixed assets such as machinery and equipment. While traditional lenders base their lending decisions on the cash flow and credit worthiness of the borrower, asset-based lenders instead look to the value and liquidity of the assets to be secured. In light of their focus on asset value, asset-based lenders typically conduct extensive due diligence, which can include an audit or appraisal of the borrowers' assets.
From a ranking perspective, asset-based lenders require first priority over the collateral for the loan, which may involve negotiating and executing priority agreements with other lenders. Because these lenders require comprehensive security, filings can be quite complex where multiple jurisdictions are involved.
This space is serviced by a wide variety of players, including foreign and domestic banks, leasing companies, factoring firms, and even private equity firms and hedge funds. Loans can involve one or more lenders, and are often syndicated. They will often be cross-border transactions, such as where a corporation has affiliates in one or more other countries.
Counsel working in this area provide advice regarding deal structure and the perfection of security, draft and negotiate documentation, and assist in due diligence.RECENT DEVELOPMENTS
The past year was marked by several initiatives that impact upon asset-based lenders and their clients. Two are of particular interest.A. Canadian Secured Credit Facility
The 2010 federal budget confirmed the expiry of the Canadian Secured Credit Facility (CSCF), a $12 billion program introduced as part of the economic stimulus plan, under which securitized vehicle and equipment loans were purchased from originators. In its stead, the budget announced a new program, the Vehicle and Equipment Financing Partnership, for smaller equipment and vehicle finance and leasing companies. This program is funded and managed by the BDC, with an initial commitment of $500 million in funding. The intent is to expand financing options for small and medium-sized finance and leasing companies in order to increase the availability of credit at market rates for dealers and users of vehicles.B. Covered Bond Issues
This year has seen a rise in the use of covered bonds by Canadian financial institutions, which may prove to be simply the tip of the iceberg. Covered bonds are direct obligations of the issuer, unlike asset-backed securities, which are deliberately structured as off-balance-sheet transactions. They are backed by a dedicated pool of assets which are available solely for the benefit of the bondholders in the event the issuer becomes bankrupt or insolvent.
Federal deposit-taking institutions have been able to utilize covered bonds since 2007, when OSFI issued a notice to the industry permitting their use on a limited basis. However, no legislation exists in Canada to address quality and coverage requirements, monitoring and protection for investors in the event the issuer goes bankrupt. As a result, issuers have relied on a structured contractual framework, which provides less clarity to investors. In addition, a large part of the financial services sector in Canada is occupied by credit unions and caisses populaires, which are provincially regulated, and have not been granted similar freedom to that made available by OSFI.
The 2010 federal budget indicated that legislation setting out a framework for covered bonds is forthcoming. The budget also suggested that credit unions will be permitted to incorporate federally, presumably allowing them to take advantage of OFSI's approach on covered bonds. In May 2011, the Department of Finance issued a consultation paper dealing with covered bonds, which contemplates the adoption of covered bonds legislation. Lastly, the AMF, which is responsible for the regulation and oversight of Québec's financial sector, laid down some initial ground rules on covered bond issues.