A hurricane destroys $20 billion in coastal property. Your cat bond pays Secured Overnight Financing Rate (SOFR) plus 6.5%. The question is not whether you lose principal. It is which trigger type determines your payout, and whether the collateral trust survived its own counterparty exposure. That distinction cost real investors real money in 2008.
Asset-based lending ties the loan amount directly to collateral rather than to the borrower's cash flow or credit rating. The lender calculates a borrowing base by applying advance rates to each category of eligible collateral.
The typical ABL borrower is a small or midsize company. Loan sizes range from $10 million to $50 million, with some significantly larger. Borrowers operate across retail, distribution, manufacturing, wholesale, and services. The defining trait is an asset-rich balance sheet, with half or more of total assets sitting in working capital (inventory and accounts receivable). Lenders look for a proven management team, market strength in the borrower's industry, and strong financial accounting and IT systems that produce reliable data on collateral performance.
Common mistakes
- Misstating ABL advance rates. Receivables run 70% to 85% (90% with credit insurance), and inventory is 80% to 90% of liquidation value, not of book value. If a question puts inventory advance rates above receivables on a book-value basis, read it again. The curriculum benchmarks are the safe answer.
- Confusing prepayment risk with default risk. Prepayment risk means the borrower pays in full, just earlier than expected. You get your money back, but must reinvest at lower rates. Default risk means the borrower does not pay. The exam presents these as if they are interchangeable. They are not.
- Reversing the basis risk / moral hazard ranking. Indemnity triggers have the lowest basis risk (payout matches actual losses) but the highest moral hazard (sponsor controls claims). Parametric triggers are the opposite. Candidates who memorize the table backwards will pick the wrong answer every time.
Bottom line
- Asset-based borrowing base equals eligible collateral times advance rates: receivables 70-85% (90% with credit insurance), inventory 80-90% of liquidation value (not book), equipment discounted on liquidity.
- The typical ABL borrower is small to midsize, asset-rich, and noninvestment-grade; loans run $10-50M, chosen because asset values are less volatile than EBITDA multiples across cycles.
- An ABL facility pairs a revolver with a term loan (3-5 years); seasonal overadvance covers working-capital spikes, traditional overadvance funds LBOs, and the fixed charge coverage ratio replaces net leverage.
- ABL carries five specialized risks: collateral valuation, process and people, hedging, legal (attachment and perfecting security interest), and exit timing.
Exam shortcut
When you see a cat bond question, immediately ask: "Which trigger type?" The ranking is always the same. Indemnity at one extreme (lowest basis risk, highest moral hazard), parametric at the other (highest basis risk, lowest moral hazard). If the question describes payout based on actual sponsor losses, it is indemnity. If it describes payout based on wind speed or earthquake magnitude, it is parametric. No exceptions.
The full lesson (about 6,933 words, 46 min read) adds 2 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- strategies
- credit risk bankruptcy
- bonds loans
- direct lending
- mezzanine
- advanced mezzanine
- venture debt
- distressed debt
- asset based lending
- abs risks
- abs
- mortgage overview
- residential mortgages
- mortgage reit returns
- cat bonds
- cat trigger types
- cat valuation
- longevity mortality
- life settlements
- viatical
- structuring overview
- cmos
- cdo intro
- cdo variations
- balance sheet arbitrage cdo
- arbitrage cdo mechanics
- cash flow vs market value cdo
- other cdos
- cdo risks
- credit enhancements
- credit deriv markets
- cds
- cds index
- other credit derivs
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