Asset-based financing (ABF) is financing secured by the capital asset for which the financing is required.
Asset-based financing (ABF) from Atradius is a form of financing in which the capital asset is given as collateral. It thus serves as security for repayment of the loan. In case of default, the capital asset can be monetized. This limits or even prevents the loss. If the value of the asset is large in relation to the amount lent, that value can be relied upon when assessing the credit risk. The borrower's creditworthiness does still matter (after all, it is not preferable to monetize the capital asset), but the value of the capital asset provides additional comfort. The ABF assessment is applicable to repatriable capital goods with a predictable second-hand value.
Cover for an ABF transaction can be requested by a bank (Financing Policy) or an exporter (Exporter Policy or Lease Policy). For an overview of the features of these policies see(Financing, Exporter and Lease Policy).
Once we receive the application, we will get to work on the ABF assessment.
An ABF transaction must meet a number of conditions in order to be applied within export credit insurance. These conditions are listed below.
Capital good
ABF is best suited for repatriable capital goods with a predictable second-hand value.
Security
The security over the capital asset should be in the nature of legal ownership (financial lease), mortgage or other right allowing possession after non-payment.
Valuation
The future market value of the capital asset must be estimated upon acceptance of the risk. This should be done on the basis of an objective "value study" prepared by an independent expert. Instead, the insured may also guarantee the residual value itself, by means of a buy-back guarantee. The capital asset must have an expected market value higher than the residual debt service when the risk is accepted and throughout the entire credit period.
Cash Flow
When debtor is in the form of a special purpose company (SPC), the cash flow forecast, among other things, is included in the assessment (applying the project finance assessment, (see Project Finance). This includes whether purchase contracts can be relied upon for repayment obligations.
Maintenance
The capital asset shall be carefully maintained during the credit term, and where relevant in accordance with international standards.
Insurance
Appropriate property insurance must be taken out (including against damage, destruction, theft and liability).
Legal opinion
Repatriation of the capital asset must be legally possible. A current "legal opinion" from an independent legal expert on the legal system of the debtor country and any different contractually applicable jurisdiction must be available. The legal opinion and/or other advice must show that repatriation is legally possible and can take place within a reasonable period of time.
The costs of the "legal opinion" and/or other advice shall in principle be borne by the insured party.
Repatriation of the capital asset must be possible (legally) in case of:
- non-payment by debtor;
- non-payment by the debtor country (e.g. non-transfer);
- non-fulfillment of maintenance obligations by debtor;
- non-fulfillment of obligations under property insurance and liability insurance, respectively.
The financing documentation should include a comprehensive "default clause" for this purpose.
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.
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.
