PORTFOLIO MANAGER JUSTIN WARD PUBLISHED IN ACUITY MAGAZINE

28th August 2020
PORTFOLIO MANAGER JUSTIN WARD PUBLISHED IN ACUITY MAGAZINE

Disputes finance as a corporate finance tool

Asset based lending is a common financing product and, increasingly, businesses are utilising their disputes assets, such as litigation or arbitration cases, as the collateral within ABL facilities.

What is Asset Based Lending (ABL)?

ABL is a form of secured lending where the lender advances funds based on the value of the collateral pledged by the borrower. Typically, pledged assets include:

  • trade receivables;
  • inventory or stock;
  • plant and equipment; or
  • real estate.

Ordinarily, repayment of an ABL facility is effected by the realisation of trading assets through the ordinary course of business (where security is in the form of trade receivables and inventory or stock). For non-trading assets, facilities are usually structured as a term loan with periodic payments.

Disputes as ABL collateral

Disputes funding is simply another form of asset backed financing. When dispute assets are pledged as security, the provider of disputes finance agrees to pay the costs associated with a particular dispute or a group of disputes, and may also provide adverse costs cover or cash advances to the borrower. The facility is non-recourse, meaning that if the borrower is unsuccessful, the financier is not repaid and will have no recourse to the assets of the borrower in order to recover the funds advanced.

In the event that the borrower achieves a successful outcome in the dispute, the financier will be reimbursed the sum drawn and will receive a premium reflecting the risk it carried in financing the dispute. The financier’s premium is often structured as a percentage of the recovery, or as a multiple of the sum drawn.

What types of disputes can be financed?

Providers of disputes finance are uniquely positioned to provide funding secured against a dispute and to ascribe value to that dispute despite the uncertainties associated with the outcome and timing of the litigation.

Any type of dispute may be suitable for finance, and they commonly include:

  • commercial litigation;
  • international arbitration;
  • intellectual property matters.

Why use ABL facilities

There are a number of reasons that a business would utilise an ABL facility and structure it in a particular way. This is often linked to a business need or objective:

Business Need Facility objective Structure
Working capital
  • Match cash outflows and cash inflows
  • Provide additional capital to a business to enable it to trade or purchase additional assets
  • Flexibility and ease of use
  • Invoice discounting or factoring
  • Trade finance
  • Asset sale and lease back
  • P&E equity access facility
  • Property mortgage
Risk mitigation
  • Quarantine asset-specific risks to that asset
  • Protect the business from identifiable risks
  • Manage asset cashflows independent of business cashflows
  • Diversification of capital sources
  • Non-recourse invoice factoring
  • Non-recourse mezzanine finance facility
  • Asset sale and lease back
Reorganisation / Restructure
  • Fund costs of reorganisation and cashflows
  • Enable a business to pivot or right size to meet ongoing demand
  • Understanding of the business circumstances
  • Property mortgage
  • P&E equity access facility
  • Invoice discounting or factoring

 

Why use disputes finance

As above, it is again business needs and objectives that drive the adoption of disputes finance:

Business Need Disputes Finance Benefits
Working capital
  • Company no longer needs to fund dispute or litigation costs from its daily working capital.
  • Removing payment obligation from cashflow provides more certainty in relation to working capital.
  • The ability to monetise dispute or litigation assets, with an upfront payment can provide access to cash for capital expansion.
  • Enables businesses to preserve cash in times of uncertainty.
Risk mitigation
  • Disputes finance is non-recourse, meaning that the provider of the finance assumes the risk of an unsuccessful outcome, while the company retains the benefit of a successful outcome.
  • The financier may provide adverse costs cover which protects the company from paying costs awarded against it.
  • The ability to monetise a dispute or litigation asset, with an upfront payment further reduces the risk that no part of that asset will be realised.
  • Enables businesses to preserve cash in times of uncertainty.
Restructure / Turnaround
  • The ability to monetise dispute assets, with an upfront payment providing access to cash for capital expansion.
  • Legal costs are no longer paid by the company, enabling the business to preserve cash and provide certainty around cashflows.
  • The transfer of risk to a third party simplifies the turnaround process and allows management to focus on the business.

In addition to general business needs, the following specific needs may also be addressed by way of a disputes finance product:

Dispute Needs Disputes Finance Benefits
Bundling claims and defence cases If a business has multiple disputes, a portfolio solution can be provided. This ensures that all disputes have an appropriate capital allocation and can be fully prosecuted and defended.
Promoting settlement Disputes finance can change the dynamics of a dispute.   The dispute can be efficiently prosecuted on its merits, without the company compromising its financial position. For this reason, the company enters settlement negotiations on at least an equal (if not greater) footing with its counterpart.
Prosecuting claimant cases The costs of running a case can quickly add up, and it can become difficult for a business to continue to fund notwithstanding that prospects may be good. Disputes finance provides a solution to keep the prosecution running. By removing the financial hurdles to prosecuting claims, claimants can focus on the claim’s merits.
Unlocking value By sharing the risk and rewards of the dispute, monetisation of the case can be booked as revenue at a time of the company’s choosing.
Project management Providers of disputes finance are often expert at efficiently managing disputes to a successful outcome. The involvement of a litigation funder may provide the business with added assistance in the management of costs and the implementation of effective dispute strategy.

 

About the Authors

Justin Ward

Justin is a Chartered Accountant and Portfolio Manager at Litigation Capital Management, a leading international provider of dispute financing solutions. Headquartered in Australia and publicly listed, LCM provides capital and risk management services into the disputes market, including in insolvency, commercial and arbitral disputes, and corporate portfolios.

Glenn Livingstone

Glenn is a Chartered Accountant, Registered Liquidator and Partner in the Restructuring Services team at KPMG, based in Sydney.  KPMG is the largest Restructuring Services team in Australia.

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