...Scope and Structure: This report reviews Fitch's methodologies in the recovery analysis on asset-based lending (ABL) facilities and compares results to actual bankruptcy outcomes. The first half of the report focuses on structural attributes of ABL and compares ABL and cash-flow- (CF) based lending. The second half focuses on the recovery analysis of the ABL facilities with summaries of cases from Fitch's bankruptcy studies and illustrative examples showing the mechanism of Fitch's bespoke model. Inherently Secure Capital Structure: ABL relies on inherently secure structural features, different from traditional CF-based secured lending. Structural protections ensure that lenders will not be undersecured at any given time. The protections include the borrowing base formula that limits advances strictly "inside of" the net realizable value of relatively liquid collateral, lender control over cash collections and frequent collateral monitoring. Consequently, the risk associated with ABL is...
