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Asset Based Lending

Asset based lending by a healthcare company to provide loans to consumers to pay for their treatment

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What is asset based lending?

Asset-based lending is the business of lending money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower.

The asset-based lending industry is also known as asset-based financing or borrowing base financing.

An asset-based facility is a type of working capital facility. It is structured such that the amount which the borrower may borrow from time to time is linked to the value of a fluctuating pool of assets. This pool of assets is known as the 'borrowing base'.

Asset-based facilities are attractive to lending banks. The security which is taken as part of the structure provides credit risk mitigation which can result in better regulatory capital treatment (and which can, in turn, translate into lower pricing being offered to the borrower). Also, given that facility outstandings are linked to the value of the underlying borrowing base, and that the banks can exert control over the resulting cashflows, a borrowing base facility is 'self-liquidating' in nature, that is, the facility should be repaid through the assets which are the subject of the financing. Asset-based facilities also give the lending banks the ability to track the performance of the borrower's underlying business, and market conditions, on a regular basis.
What is the typical structure of an asset based facility?

Asset-based facilities are highly structured and can require a substantial amount of legal documentation to implement. Banks will need to carry out a significant amount of due diligence in the structuring phase and engage in the ongoing administration and monitoring of the facility during its operational term.

Banks typically provide asset-based facilities on a medium-term basis with tenors of between 2 to 5 years. Frequently, the overall maximum amount available under the facility will begin to reduce during the final year (run-off period) to mitigate refinancing risks which might otherwise arise. The borrower will normally have the right to request an extension of the facility before the run-off period commences.

Given that the borrower will need the ability to draw down a greater or lesser amount (depending on the size of the borrowing base from time to time), an asset-based facility will be provided on a revolving basis. The rollover period will usually be linked to the delivery of a report (borrowing base report) which the borrower will be required to provide to evidence the current status of the borrowing base. The amount which the borrower will then be permitted to draw (or continue to utilise) for the next rollover period will be limited to the value of the borrowing base as shown in that borrowing base report. The facility will also be subject to a maximum overall outstanding amount.

An asset-based facility is a secured structure. Security is provided over all assets which could potentially be included in the borrowing base, that is, inventory and receivables. Security will also be taken over specially designated bank accounts which are established as part of the structure and into which end buyers will be directed to make payments in respect of receivables (collection accounts). There may also be a further separate reserve account (reserve account) established to address shortfalls in the borrowing base. Security would be taken over that account as well. Other aspects will also need to be considered in connection with the security package, for example, insurance policies covering borrowing base assets.
Healthcare example of an asset based lending transaction

Let's look at this in the context of a healthcare company providing treatment. The healthcare company may wish to to provide loans to its clients to pay for their treatment.
A healthcare company wishes to provide loans (“Loans”) to consumers who are receivers of healthcare to pay for their treatment.
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A lender (the “Consumer Lender”) is established to provide the Loans, the lender being funded by secured loans from private investors.
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A special purpose vehicle (“SPV”) is established to purchase Loans which satisfy certain eligibility criteria from the Consumer Lender.
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The SPV establishes a note issuance facility (the “Facility”) under which it issues notes (the “Notes”) to a lender (the “Lender”) in an amount equal to the borrowing base i.e. the principal amount of the portfolio (the “Portfolio”) of Loans against which the Lender wishes to secure its loan to the SPV.
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The SPV purchases the Portfolio from the Consumer Lender with the proceeds of the issuance of the Notes.
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The Loans are serviced by a servicer who could be part of the same group as the Consumer Lender or an independent third-party servicer.
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Please contact us to discuss how we can help you structure your next asset-based facility.
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Avery Law is the business and trading name for a legal practice carried on by Avery Law LLP. Avery Law LLP is a limited liability partnership, registered in England and Wales, with registered number OC374426, with its registered office at 25 Wilton Road, London, SW1V 1LW.

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