The transition towards a circular economy requires new business models. One of the most promising is the asset company model: companies that own, maintain and deploy assets while customers pay for their usage rather than ownership.
In essence, asset companies enable the purest form of “pay-per-use” economics. Instead of selling products, assets remain in the ecosystem for longer, are professionally maintained, and can even enter second-life cycles. This dramatically increases asset longevity and reduces resource consumption.
Ironically, the very companies that enable this circular model face structural financing challenges under Basel IV / CRR III.
Asset companies are inherently capital intensive.
Before generating any EBITDA, they must first invest in assets. Only once these assets are deployed to customers do they start generating recurring revenues.
This creates a structural reality:
🔹 Assets must be purchased upfront
🔹 Debt financing is necessary to fund the asset base
🔹 EBITDA follows after deployment
In other words, investment precedes earnings.
This model works well economically because assets often have long useful lives, especially when maintained by specialists who deeply understand the equipment they operate.
From a circular economy perspective, this is ideal:
🔹 Assets last longer
🔹 Maintenance improves lifecycle efficiency
🔹Second-life usage becomes possible
🔹 Natural resources are preserved
However, the financing framework does not always recognize this logic.
Under current regulatory and banking practices influenced by Basel IV and CRR III, credit analysis relies heavily on cash flow metrics, most notably:
Net Debt / EBITDA (leverage ratio)
For most lenders, this ratio effectively determines credit capacity.
In leveraged finance markets, the practical thresholds are:
🟩 ~3.0x Net Debt / EBITDA as a comfortable level
🟧 3.5x peak leverage as an upper boundary
🟥 4.0x leverage as the absolute ceiling
Above this level, financing becomes extremely difficult or economically unattractive for lenders, especially considering EBA leveraged transaction guidance and ECB large exposure considerations.
And here lies the structural issue.
Unlike real estate financing or certain forms of specialised lending (for example shipping SPVs or project finance), asset companies are not treated as a distinct financing category.
Yet economically they share many similarities:
🔹 large pools of tangible collateral
🔹 long-lived assets
🔹 predictable recurring revenues with long-term use contracts
🔹 strong asset-backed downside protection
Nevertheless, their financing is assessed primarily through short-term leverage metrics.
This creates a paradox.
To generate EBITDA, an asset company must invest in assets first.
But investing in assets requires debt financing, which increases leverage.
To remain within leverage covenants, companies must then repay debt faster than the assets actually depreciate or remain economically useful.
This leads to several unintended consequences:
🔹 Asset pools become underutilised
🔹 Financing costs increase
🔹 Expansion becomes constrained
🔹 Circular models become harder to scale
In other words, companies that extend the life of assets are not structurally encouraged by the financing framework to do so.
From both a natural resource perspective and an economic perspective, this is clearly suboptimal.
Ironically, asset companies are often extremely creditworthy when looking at their balance sheet from an asset perspective.
Large diversified pools of equipment can represent substantial collateral value.
In many cases, the aggregate asset base significantly exceeds outstanding debt, creating a robust downside protection for lenders — similar to the way real estate is often perceived as a safe collateral class.
Yet this asset-backed dimension is often underweighted in leverage-driven credit frameworks.
At Ernest Partners we encounter this challenge frequently in practice.
The good news is that solutions do exist.
More sophisticated financing structures can better reflect the economic reality of asset companies, aligning:
🔹 asset lifecycles and long-term use contracts
🔹 financing tenors
🔹 leverage metrics
🔹 collateral value
Doing so not only improves financing efficiency — it also supports the scaling of circular business models.
And that is exactly what Europe needs if it wants to make the circular economy a reality rather than a slogan.
Author:Filip Indigne Associate Partner – Ernest Partners
