Key findings include:

• MBO/MBI deals are the most prevalent in using ABL. The research illustrates that during 2006 advisers were, on average, involved in 4.9 MBO/MBI transactions where ABL was considered as a funding component, up 14% from 2005.
• Consideration of ABL as a funding solution has accelerated the greatest in M&A activity, with the average number of deals they are seeing with an ABL component in rising from 3.4 deals in 2005 to 4.8 deals across the whole of  2006. 
• MBO/MBI and M&A overtook refinancing in terms of the number of deals seen by advisers involving ABL. (see chart 1)

Last year proved to be another bumper year in terms of business transactions using ABL . According to the industry body the Asset Based Finance Association (ABFA) outstanding advances grew by 22% during 2006 to £13.65bn. This growing popularity of ABL as an alternative to conventional bank financing is underpinned by the study undertaken amongst 100 professional advisers. The report provides an insight into how advisers, such as accountants, corporate financiers and lawyers, view the current state of the market and what they think in terms of future trends over the coming 12 months.

Turnaround transactions also saw a growth in the use of ABL with the average number of deals rising from 2.2 in 2005 to 2.9 in 2006.  The resurgence of this sector is likely to highlight the increased number of business failures witnessed during the course of last 12 months.

On the back of recent rate rises and greater economic uncertainty adviser sentiment is more pessimistic with over two fifths (41%) strongly believing that insolvencies will rise significantly over the next 12 months. Regionally, advisers in London are the most pessimistic with almost half (49%) saying that they expect insolvencies to increase significantly. It is in the Midlands where they are the most optimistic, with 29% saying the same thing.

Such consensus is somewhat blurred when their views on the effects of businesses failures on pricing and covenants within the ABL were examined; whilst over a third (36%) strongly believe that margins will increase, over half (58%) strongly believed that covenants will tighten. On the other side, 30% believe that margins will continue to fall and 14% believe that covenants will relax.

John Jenkins CEO of GE Commercial Finance, Business Finance commented: “The use of ABL has really come of age, and now is more readily accepted by the financial community as a true alternative to traditional bank lending in complex transactions. The old view of ABL only being suitable for turnaround situations is now a distant memory with it now featuring prominently in funding advisers' use in MBO/MBI and M&A deals”.

Chart 1.