Banner
Guest Editorial

Long-term growth

Why asset-based finance remains run of the mill for midsize metals companies

MM-1013-guest-leadOctober 2013 - In the early 2000s, the metals industry faced oversupply, plummeting prices and consolidation. Once-mighty companies, such as the now-defunct Bethlehem Steel, saw 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 because ABL offered 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, about 30 to 90 days. Their margins will improve in a rising price environment, but if prices fall, 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 main way metals companies finance their working capital. With ABL, the credit extended by lenders is based on the liquidation value of the business’ assets. Asset-based revolvers help companies bridge the gap between the cash flow their sales will generate and the amount of their current expenses.

Besides working capital needs, there is growing demand for merger and acquisition financing, as well as large capital expenditures among metal companies. For example, both service centers and scrap companies are fragmented sectors comprised of hundreds of various-sized firms that could consolidate. Meanwhile, hydraulic fracturing and the emergence of shale plays are propelling the pipe and tube sector. These companies are looking upstream and downstream for acquisitions or are considering building facilities for heat treating and threaders, for instance, to vertically integrate and capture more of the profits along the value chain.

The critical difference

For metals companies reaching for such growth opportunities, asset-based loans offer financial flexibility. Typically asset-based loans don’t have standing financial maintenance covenants. Instead, as long as the borrower maintains a certain threshold of borrowing availability, it never has to prove compliance with financial covenant ratios. This gives a company the flexible financing to handle problems and seize opportunities without worrying about financial covenants and negative funding implications.

In addition, because ABL availability is based on asset levels, availability grows as asset levels grow. Thus, asset-based loans are a useful financing alternative for midsize and even larger middle-market metals companies. This is key in the metals industry, where inventory prices can ebb and flow with the business cycle.

Whatever the situation, the industry’s cyclicality and exposure to commodity volatility make it critical to work with a lender that understands the industry and is patient throughout the cycle. The right lender will help a company navigate the tumultuous ups and downs of the market and build the business for the long term. MM

Paul Feehan ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), is senior managing director, Metals and Energy Lending at GE Capital, Corporate Finance. His experience encompasses all types of financings—from common equity investments to senior loans, including asset-based loans, cash-flow loans, structured leases, debtor-in-possession and plan-of-reorganization loans. For more information, visit gecapital.com/metals.

 

Current Issue

MM-Cover-9-14-current

September 2014

ON THE COVER: 
Tense trade
Reaching a tipping point in volume, steel imports face the weight of politics.

MM-Digital-button-current1

Subscribe: PRINT/DIGITAL MAGAZINE - eNEWSLETTERS

Midwest-MM-home-ad-5

Advertisement

Modern Metals on Twitter

White Papers

More White Papers >
Banner

Industry Partners

Aluminum

Coil Processing

Rolled and Extruded Aluminum Products

Stainless, Nickel, Aluminum, Pipe, Tube & Bar

Sapa Extrusions North America Braner USA Aleris Rolled Products Prudential Stainless & Alloys, L.P.

Bar

Butech Bliss

Sawing Technology

Steel

Gerdau Special Steel North America Machine Concepts KMT Saw Parker Steel Co.

CNC Cutting (Plasma, Waterjet, Laser, Router)

Red Bud Industries Metlsaw Systems Summit Steel Corporation
Multicam Inc. Tishken Sawblade.com

Thickness Gauges

CNC Solutions

Laser Cutting Machines

Service Centers

Advanced Gauging Technologies
FastCAM Inc. Trumpf Admiral Steel

Tube & Pipe

Coated Coil

Lubrication Systems

United Performance Metals Independence Tube Corp.
Centria Coating Services Unist, Inc.

Software

Turnkey Finishing System

Double Globus Inc.

Machining Centers

Enmark Systems, Inc. Intellifinishing
Dura Coat Products, Inc. Handtmann CNC

Specialty Roller Coverings and Coatings

Waterjet

Metal Coaters

Metal Alloy Analysis & Verification

American Roller Company OMAX Corporation

Coil Coating

Thermo Scientific Niton Analyzers

Stainless Steel

TECHNI Waterjet
Chemcoaters

Metal Finishing & Deburring

Straub Metal International

Welding

 

Supermax Tools Ta Chen International, Inc. Koike Aronson

 

Plate

 

 

 

Artco Group

 

 

TrendPublishing

twitter facebook linkedin rss