Get ready for a detox

2007 has been another great year for the ABL industry. Having just returned from the ABFA's first conference in Venice, where we were headline sponsors, it was clear from the mood that clients are doing well in the run up to Christmas. However, this is the seasonal norm for this time of year but, as the classic song goes, "there may be trouble ahead". In fact, could it even be that this November is showing an artificial high for clients that use ABL funding?

In the restructuring profession, we know that from about the third week in December, probably around the time when you are reading this article, traditionally, we get very busy. Business does seem to close a week before Christmas for many clients, and resume sometime in January. During this time, revenue can be reduced because of the shorter trading period and costs often increase, with the impact of holiday pay.

Therefore, January can be a long dark month and so let's hope we are all ready for a greater workload, and some unexpected failures. Whilst we endeavour to keep our clients informed of potential problems, not all of our fellow IP's operate in the same manner. As sure as eggs are eggs, there will be plans being hatched to the surprise of a few ABL lenders I am sure!

However, there are some worrying trends in the market. One of these is the trend towards a typical 90% advance rate. This is a particular worry because it's overcompetitive pricing. The fact that there is currently more competition for deals, means that hidden reserves are being removed, and disapprovals are being stretched to 120 days. There is also a trend towards all assets of a company to be financed, and for quite large companies to have no, or hardly any truly unencumbered assets. Overleveraged deals are great in a rising market where companies can borrow their way out of trouble but if the credit crunch does hit in the new year, this will cause a lot of problems, especially for the private equity firms.

There is also always a pressure, pre Christmas year-end to get "that deal" on the books and there are plenty of "exotic flavour of the month deals" that are being recycled. However in the new year, when the detox starts, and in the cold light of day, when the fizz has gone out of the champagne - what are you going to be left with in 2008? A potential headache is what I predict!

So to avoid the post-Christmas hangover and the morning after feeling of, "Why did we do that?" there are a few things to look out for now.
One of these is ever increasing utilisation levels.

Watch out for clients who no longer have good headroom and are starting to max out on their limits. Increase your attention to a company's financials. Just because a sales ledger is faultless, it will not save you if the business is loss making, as cash will always lag a loss. Finding out sometime in February, that your client lost big money in the final quarter of 2007 may sadly be too late to save a business. Finally, proactively look out for companies whose debtor days are going out. This is always a sign of either pre-invoicing or bad credit management - neither of which will have a happy ending in our experience.

So if it comes to crunch time in January 2008. What do you do other than phone a reliable firm of restructuring and collection specialists like Menzies? Well hopefully, in reality you are not at 90% and the directors are being straight, honest and in addition, with any luck the ledger is collectible. Sadly, however, we all know that this is not always the case.

So, has the cycle turned? Well, with so many changing circumstances a lot of the dust is yet to settle from all the recent turbulence, the short answer is "Who knows?" Whatever the case, let's hope it's not crunch time for you in January.

On behalf of all of us at MCR, I would like to thank all of our clients and friends in the ABL market for their support in 2007. We wish you all a Happy Christmas and look forward to seeing you in the New Year.