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GE Capital, Corporate Finance

Back in the early 2000s the metals industry faced oversupply, plummeting prices and a wave of consolidation. Once-mighty companies such as the now-defunct Bethlehem Steel saw their credit ratings decline and failed to meet covenants on their cash-flow credit facilities. A sea change in financing tactics ensued. Lenders and metals companies turned away from cash-flow credit facilities to asset-based lending (ABL) because ABL offered the companies the flexibility and liquidity necessary to compete in a highly cyclical, global marketplace.

To illustrate why cash-flow loans fell out of favor, consider the business model of service centers, which act as distributors. They hold inventory for a short period of time, approximately 30 to 90 days. In a rising price environment their margins will improve, but in a falling price environment those margins may contract and perhaps turn negative. As a result, a company with a cash-flow facility that has financial covenants could quickly find itself in default if commodity prices tumble and cash flows drop.

Today, ABL is the predominant way companies in the metals industry finance their working capital. With ABL, the amount of credit extended by lenders is based on the liquidation value of the assets owned by the business. Asset-based revolvers help companies to bridge the gap between the cash flow they eventually will receive from sales and the amount of their current expenses. Download the White Paper >

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November 2014

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