Lending keeps pasta firm on the boil

Historically a seldom-used option on the corporate financing menu, asset-based lending (ABL) has steadily gained in popularity – boosted most recently by inflationary pressures and volatile commodity prices.

A growing number of businesses, particularly in asset-heavy sectors, have come to appreciate the potential value of ABL as a solution for supporting their working capital requirements.

“The UK ABL market has stood up well compared to other forms of debt,” notes Ivor McTighe, Head of Asset-Based Lending Origination at HSBC UK. “The latest figures from UK Finance at September 2023 show ABL users grew by 9.8% year-on-year, while client numbers overall remained steady.”

Higher value opportunity

In part, this growing popularity may reflect corporates’ revival of capital investment plans held off during the pandemic years and the costs spike. Another spur is the trend for holding greater inventory – a response to the supply chain disruptions of recent years – which has pushed working capital requirements higher.

For growing businesses that require investment to fuel expansion, there are advantages to ABL, McTighe argues. “For a low-margin business with a strong asset base, an ABL structure can secure a higher level of financing in line with their growth. ABL facilities also benefit from fewer covenants than other facilities. They can even be used to support acquisition or share capitalisation.”

Where some providers are limited in their coverage, HSBC UK is able to provide ABL against the full range of asset classes – receivables, inventory, property, plant and machinery. The bank’s global reach and scale enable it to offer high-value facilities on a bilateral basis.

Ceiling on growth

These capabilities have proved invaluable for Norfolk-based Pasta Foods and its sister business, Snack Creations.

Pasta Foods is the UK’s sole dried pasta manufacturer, with its own semolina mill and pasta factory, supplying large food manufacturers. Snack Creations innovates in the snack pellet market, using ingredients such as potato, lentils, chickpeas and yellow peas, which are sold as healthy eating snacks to its clients worldwide.

Pasta Foods has enjoyed double-digit growth in recent years, amid buoyant demand for UK pasta products. Prospects for Snack Creations are also bright, given expansion in the global market for healthy food options. Its ambitions had hit a ceiling, however, due to capacity constraints at its factory in Great Yarmouth.

The business had been seeking a viable new site for several years. When an opportunity arose to acquire the ideal building, a 200,000 sq ft former data centre in Norwich, its directors needed to move fast. “We had to buy the facility within a limited window, otherwise we risked losing the opportunity,” explains Finance Director Andrew Gunton.

Working capital unlocked

While HSBC UK did not have a banking relationship with Pasta Foods at the time, it had a sound understanding of the company’s needs, having been in discussion with its directors for some five years. It offered a £27m asset-based lending package that would not only enable the purchase of the additional building and equipping of production lines for the new factory, but would also cover inventory and debtors, maintaining the working capital needs of the business.

For Gunton, these additional elements were critical. Pasta Foods buys vessels of wheat from Europe every few weeks. The outlay has soared since crop failures and the war in Ukraine pushed up global wheat prices.

“High prices will continue for the foreseeable future, mainly because of extreme weather, but also due to supply challenges,” Gunton explains. “The way we can mitigate some of that is by having a broad supply base, and also by holding more stock than we used to. The ABL facility allows us to do that, because we can get financing for inventory levels.”

The ABL package entailed the refinancing of several facilities with other banks. “We looked at the existing lending base, but they couldn’t offer the full services in terms of trading facilities,” says Gunton.

Expansion and efficiency

Another important extra feature of the HSBC UK deal is an £8m trade finance facility, for staged payment of the new factory’s production lines. This will cover its import from Europe and its assembly during the eight-month commissioning phase.

The financing of the factory and its kit will open up a host of growth opportunities, Gunton explains. “Besides general expansion and the ability to drive further new product development, it will enable us to respond to customer demands,” he says.

“The new facility will create a significant increase in capacity and provide the scope for our predicted growth. We are also looking at how we power the new site: solar is definitely high on the agenda, and we’ll be speaking to HSBC UK about the possibility of lending for that purpose.”

Speed and efficiency

Gunton was impressed at the speed with which the single ABL facility was arranged by HSBC UK, a process that involved legal teams, exit banks and the building vendor. “To go from initial meeting to refinancing in six months is market-leading, given the complexity of what we had to do,” he observes.

Since then, access to the funding has been smooth: “The HSBCnet platform is very user-friendly. It allows us to call upon the cash we need on the same day, which is fantastic.”

The result is the freedom to access flexible working capital for Pasta Foods’ changing needs – and the opportunity to pursue Snack Creations’ ambition to emulate Pasta Foods in delivering double-digit growth.