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The Art of Asset-based Lending

Posted by Wendell Brock on Fri, Feb 12, 2010

If art imitates life, then the burgeoning market of art-as-loan-collateral is a mirror of today's financial sector, of asset-based lending.

Last year, venerable portrait photographer Annie Leibovitz  called on Art Capital Group (ACG) for a $15.5M loan. Leibovitz's collateral? The rights to her entire photograph collection.

ACG only makes loans against an artist's or art patron's collection. Their website explains: "Unlike traditional sources of capital, we are comfortable utilizing fine and decorative art as the sole asset securing a loan or as a component of a collateral package."

And you thought the medical profession was specialized.

A preeminent photographer borrowing against her artistic catalog makes headlines (and blogs!), but asset-based lending and lending tailored to a business industry aren't new nor confined to the fine arts.

What is new is how popular this lending practice has become.

As Kyle Stock writes in the Wall Street Journal, "Asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion in 2008, according to the Commercial Finance Association, an industry trade group. The association is still gathering data on 2009, but preliminary surveys show double-digit percent increases in lending. In comparison, syndicated lending in 2009 sagged by 39%, according to Dealogic Inc."

Interest rates for asset-based lending are typically higher than traditional loans, but still less than a credit card's terms. And if you can't persuade a bank to lend money through the usual channels-whether because of poor credit or the contracted credit market-then it's your best option.

Loans are made based on a business's accounts receivable, invoices, inventory, patents, and equipment. Most lenders require a detailed (and optimistic) business plan. But depending on the lender, businesses can use the cash for, among other things, acquisition, management buyout, recapitalization, growth financing, and turnaround.

Along with higher interest rates than traditional loans, asset-based loans also typically carry stiffer penalties for default, including a quick seizure of the collateral rather than a penalty. And if a bank has to liquidate assets, knowledge of the industry is very important.

Asset-based lending that matches a specialized lender with a customer-as with Leibovitz's loan-benefits both parties. The lender knows that what they're-literally-buying into, and the business gets payment terms that are tailored to their billing cycle.

Several banks around the country--both large and small--offer asset-based lending including, Bank of America, which offers several specialties, and is the asset-based lending industry leader.

According to the Wall Street Journal, the industry's biggest companies funded 23% more asset-based deals in 2009 as compared to the previous year.

And BOA, Wells Fargo, JP Morgan Chase, and TD Bank are all taking steps to expand their asset-based lending to stay competitive.

Whether this trend will continue remains to be seen. Much of it will depend on the default rate of these types of loans. Late last year, ACG accused Leibovitz of defaulting on her loan. Although ACG threatened a lawsuit, the issue was resolved last September without court proceedings.

Andy Warhol once said, "Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art."

Topics: Banking, Loans, asset, asset lending, asset-based lending

Feds Make a Change to Bank Capital Rules

Posted by Wendell Brock on Fri, Dec 19, 2008

The OCC, Federal Reserve Board, FDIC and OTS have collectively approved a final rule that permits banking organizations to reduce the goodwill deduction to tier 1 capital by the amount of any associated deferred tax liability. Banks, savings associations and bank holding companies are allowed to adopt this rule for the reporting period ending December 31, 2008.

 Prior to the adoption of this rule, the tier 1 capital calculation required banking organizations to deduct the full carrying amount of goodwill and other intangible assets resulting from a taxable business combination. This full deduction, however, was inconsistent with other aspects of the tier 1 capital computation. Other intangible assets acquired in nontaxable transactions, for example, could be deducted from tier 1 capital net of any associated deferred tax liability.

In a taxable business combination, the deferred tax liability arises from differences between tax treatment and book treatment of the asset. And, that deferred tax liability is not routinely settled for financial reporting purposes; it remains until the goodwill is written down, written off or otherwise derecognized. If the entire amount of the goodwill is impaired, the banking organization would also derecognize the associated deferred tax liability for financial reporting purposes. Therefore, the banking organization’s maximum exposure to loss with respect to the goodwill asset would be the full carrying value of that goodwill less the deferred tax liability. The spirit of this rule change is to improve the tier 1 capital computation by reflecting the banking organization’s actual exposure to loss with respect to goodwill arising from taxable business combinations. Also, the banking organization that deducts goodwill net of the associated deferred tax liability from tier 1 capital may not net that deferred tax liability against deferred tax assets for the computation of regulatory capital limitations on deferred tax assets.

 Comments largely positive

 On September 30, 2008, the regulatory agencies published a notice of proposed rulemaking requesting comments on this change. Of the thirteen comments received, only two opposed the change. Five comments suggested that the rule be adopted and available to banking organizations for the reporting period ending on December 31, 2008. The agencies have agreed with this request.

 Some of the comments also requested that the change be applied to other intangible assets as well, but did not provide sufficient data or analysis to support that request.


Other miscellaneous changes

 The OCC is also adopting other miscellaneous changes as noted in the proposed rule, including:


·         Clarification of the current treatment of intangible assets acquired due to a nontaxable purchase business combination

·         Replacement of the term “purchased mortgage servicing rights” with “servicing assets”

·         Clarification of OCC’s interpretation of existing regulatory text

·         Amendment of the goodwill definition to conform to GAAP


To review the full text of the final rule, please click here (

Topics: Bank, FDIC, OCC, OTS, capital, savings associations, tax liability, asset

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