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The borrowing base automatically resizes availability with the expansion or contraction of the underlying business, which provides substantial control (and an early warning trigger) to the lender and minimizes potential losses.

Asset-based loans also are self-liquidating, particularly in cash dominion — receipts automatically repay outstanding loans, and reborrowing requires the borrower to meet its draw conditions.

Such excessive indebtedness often means that corporate investment cannot keep pace with the expected recovery in the real economy.

Moreover, keeping over-indebted and ultimately non-viable firms alive by not resolving NPLs in a timely manner generates artificial and unhealthy competition for viable firms in the market.

(Sometimes, if excess availability is sufficiently high, the fixed charge coverage test does not apply.) In addition, asset-based loan arrangers and lenders focus on preserving the core loan terms that are unique to an asset-based loan agreement and would not be found in cash-flow loan agreements, term loan agreements or bond indentures.

We outline elements of an EU-wide blueprint for country-specific AMCs, including state aid aspects, asset and participation perimeters, asset valuation, capital and funding structure, and governance.

Asset-based lending has historically provided to borrowers a number of benefits that are generally not available under cash flow loans, including lower pricing, a general lack of financial maintenance covenants (other than a springing fixed charge coverage ratio when availability is less than a percentage of the line) and greater operational flexibility.

Asset-based loans have grown as a financing tool with greater acceptance by lenders of cross-border facilities as well as operating covenant packages that closely mirror the term loan B and high-yield markets, subject to exceptions relating to permitted investments, payment of dividends, and repurchases of stock and prepayments of junior indebtedness.

The post global financial crisis surge in NPLs in the euro area peaked in 2013, when the aggregate NPL ratio reached 8%.

While the average NPL ratio has declined gradually since then, by around one percentage point per year, differences across countries have been marked with six countries still having NPL ratios above 10%, significantly so in some cases.

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