Asset backed finance

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Asset backed finance is often styled asset backed finance, asset based finance or asset-based finance. Some authors seek to differentiate 'asset based' from 'asset backed', but use of the terms in practice is less orderly than that.

Borrowing is generally secured by specified assets or bundles of assets which generate a regular series of cash flows.

From the investor's point of view it is often called asset backed lending (ABL) (sometimes asset-backed lending, asset based lending/asset-based lending).

Used in financial services the term commonly includes such underpinning assets as mortgage loans, consumer loans and car loans.

Sometimes the originator of the financing ('producer') will sell the transaction to another firm or to a special purpose vehicle (SPV) that finances their acquisition by issuing securities (asset based securities or asset-based securities, ABS) to investors.

In financing non-financial, industrial and commercial firms, the underlying assets can be fixed assets (fixed capital) such as plant and equipment, motor vehicles, even real estate or current assets (sometimes called circulating capital) such as accounts receivable (debtors - that may be financed with or without recourse to 'borrower') and inventory (stock).

While fixed asset transactions are usually tied to particular assets, working capital transactions are more normally on a revolving basis.

From the borrower's point of view, it is important to take account of the removal of assets which are the subject of the ABF transaction from the pool of unsecured assets available to support general, unsecured creditors and contingent creditors - including: unsecured bank lenders; suppliers; defined benefit pensions schemes; staff for wages, expenses, etc.; customers for warranty, service and damages in case of misrepresentation during sale or failure to meet specifications, safety standards, etc.; affected communities if the firm should cause pollution or other social damage; and so on.

See also