Asset Based Finance

Asset-based financing (ABF) is financing secured by the capital asset for which the financing is required.

In the event of borrower default, the capital asset can be sold to pay off the financing, thus limiting or even totally eliminating any financial losses. If the value of the financed capital asset is sufficiently higher than the amount to be financed, the credit risk assessment will be based on this value. The creditworthiness of the borrower will remain important (as repossession and disposal of the capital asset to repay the loan will remain undesirable), but the value of the underlying capital asset will offer extra protection. An ABF risk assessment can be carried for capital goods which are repatriable and have a predictable resale value.

Application procedure and assessment

For the bank financing an ABF transaction, our Buyer Credit Insurance Policy provides protection against borrower default. As soon as we have received an application for a Buyer Credit Insurance Policy we can start the risk assessment process. We will always need at least the following:

1. the application form from the financing bank, exporter or lessor
2. a future value study conducted by an independent expert or a buy-back agreement from the exporter
3. a legal opinion from an independent external legal advisor/expert confirming that it is legally possible to repatriate the capital asset
4. an environmental and social impact assessment

An ABF transaction must meet certain conditions in order to qualify for export credit insurance. These conditions include:

Capital good

ABF is meant for capital goods which can be repatriated and which have a predictable resale value.

Security

The capital asset must be secured by a legal title (financial lease), a mortgage or another type of security interest which makes repossession possible in the event of borrower default.  

Valuation

The future market value of the capital good must be assessed prior to underwriting credit insurance for an ABF transaction. This value must be based on an objective valuation report drawn up by an independent expert. Alternatively, the insured may guarantee the resale value by signing a buy-back agreement. From the moment of underwriting until the end of the repayment period, the capital asset’s future market value must always exceed the outstanding debt service payments (i.e. principal plus interest, any late payment interest and fees).

Cash Flow

If the borrower is a special purpose company (SPC), the risk assessment will include a cash flow analysis (as per our project finance risk assessment procedure.[insert link] One of the relevant factors for the risk assessment will be whether or not the SPC’s repayment obligations are supported by off-take agreements for its goods/services.

Maintenance

For the duration of the credit period, the capital good must be carefully maintained; if relevant, in accordance with international standards.

Insurance

The capital asset must be adequately insured under an equipment insurance policy which includes cover for damages, total destruction, theft and public liability.

Legal opinion

It must be legally possible to repatriate the capital asset. A current legal opinion must be obtained from an independent external legal advisor about the legal system in the country of the borrower and any other jurisdiction relevant to the transaction. The legal opinion and/or any other advice obtained must make clear that repatriation is legally possible and furthermore, within a reasonable amount of time.

The costs of the legal opinion and/or any other advice are in principle to be borne by the insured.

Default clause

Repatriation of the capital asset must be legally and practically possible in the event of:

- default by the borrower

- default by the borrower’s country (e.g. transfer freeze)

- the buyer’s failure to comply with maintenance obligations

- the failure to comply with the obligations under the equipment insurance policy or the public liability insurance policy

The financing documentation must contain a detailed default clause which includes such events.

Resale period

When underwriting this insurance, Atradius will need to be satisfied that the asset can be resold or leased anew within a reasonable period of time after repossession. The length of this period will depend on the value of the asset. The nature of the asset will affect its value. The exporter/financier will be expected to play an active role (on a best effort basis) in reselling the asset.

Insurance

A bank or an exporter may apply for insurance for an ABF transaction: a bank would receive a Buyer Credit Insurance Policy and an exporter an Exporter’s Insurance Policy or a Lease Policy. For the main features of each policy please click the relevant link. [insert links for Buyer Credit Insurance Policy, Exporter’s Policy and Lease Policy]

If at the time insurance for an ABF transaction is approved, all the conditions for issuing a policy have not yet been met (including the conditions pertaining to the first drawdown under the loan), Atradius will issue a promise of cover instead of a policy.

As soon as all the conditions have been met, Atradius will issue the Buyer Credit Insurance Policy.

Deductible/insured’s own risk

Atradius believes that it is important for the financier (and if applicable, the exporter) of an asset-based finance transaction to retain a sufficient stake in the transaction. The covered percentage for commercial risks related to asset-based finance transactions is therefore lower than for regular transactions. The size of the obligatory deductible depends partly on the (spot) market risk and on how much Atradius depends on the risk assessments of third parties (including the independent external assessment of the repatriation risk, estimated resale period and valuation of the capital asset). 

If you are interested in our ABF risk assessment or have any questions, we would be pleased to provide further information.

You can reach us at +31 (0)20 553 2109 or info.dsb@atradius.com.