DOCSLIB.ORG

Navigating Borrowing Base, Article 9 Collateral Issues, and Key Loan Documentation

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Navigating Borrowing Base, Article 9 Collateral Issues, and Key Loan Documentation Presenting a live 90-minute webinar with interactive Q&A Asset-Based Lending: Navigating Borrowing Base, Article 9 Collateral Issues, and Key Loan Documentation TUESDAY, JANUARY 16, 2018 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Ari B. Blaut, Partner, Sullivan & Cromwell, New York S. Neal McKnight, Partner, Sullivan & Cromwell, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-873-1442 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail [email protected] immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again. Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For additional information about continuing education, call us at 1-800-926-7926 ext. 2. Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon. Asset-Based Lending Navigating Borrowing Base, Article 9 Collateral Issues and Key Loan Documentation Ari B. Blaut [email protected] S. Neal McKnight [email protected] Attorney Advertising Prior results do not guarantee a similar outcome. Copyright ©2018 Sullivan & Cromwell LLP Overview I. What is Asset-Based Lending? II. Borrowing Base III. Collateral IV. Covenants and Key Documentation Issues 6 Copyright ©2018 Sullivan & Cromwell LLP I. What is Asset-Based Lending? 7 Copyright ©2018 Sullivan & Cromwell LLP What is ABL? • Asset-based lending (“ABL”) is a form of secured lending where borrowing capacity is based on the value of specific assets in which the lenders have a security interest • Contrasts with “cash flow lending,” where lenders look primarily to a business’s cash generation and enterprise value when determining borrowing capacity • Common forms of ABL: • Revolving credit facilities • Factoring • Availability of loans is tied to the “borrowing base”, an amount based on a percentage of the value of the company’s borrowing base assets 8 Copyright ©2018 Sullivan & Cromwell LLP Common Uses for ABL • Working Capital • Acquisitions • Capital Expenditures • Growth • Recapitalization 9 Copyright ©2018 Sullivan & Cromwell LLP Advantages for Borrowers • Reduce cost of capital by enabling companies to borrow against the value of borrowing base assets to meet working capital needs • Assets comprising borrowing base may be better credit than borrower • Benefits of diversification of risk and substituting credit of customers (e.g., obligors on receivables) • Borrowing base assets are typically the most easily convertible into cash • ABL covenants typically allow for greater operating flexibility than those of “cash flow” revolvers 10 Copyright ©2018 Sullivan & Cromwell LLP Disadvantages for Borrowers • Typically higher upfront costs to establish • More burdensome collateral reporting and valuation requirements to establish borrowing base • Because availability is limited to the borrowing base, amounts available to be borrowed may decline with fluctuations in value or amount of receivables, inventory or other borrowing base assets • Facility agents frequently have significant discretion regarding eligibility criteria for assets comprising borrowing base and to establish reserves 11 Copyright ©2018 Sullivan & Cromwell LLP Advantages for Lenders • Lenders have first priority lien on borrowing base assets (receivables, inventory), which typically are easier to turn into cash in a foreclosure scenario • Diversification of risk • Loans are over-secured due to borrowing base limits • Low historical loss rates • More favorable regulatory requirements 12 Copyright ©2018 Sullivan & Cromwell LLP II. The Borrowing Base 13 Copyright ©2018 Sullivan & Cromwell LLP Borrowing Base Overview • Borrowing base is a formula that determines the maximum amount a borrower can borrow at any given time and is based primarily on the value of “eligible assets”, less reserves • Borrower is also limited by a fixed maximum principal amount • If the borrowing base ever falls below the amount of outstanding loans, the borrower must repay the loans so that the total outstanding amount is less than or equal to the borrowing base 14 Copyright ©2018 Sullivan & Cromwell LLP Borrowing Base Assets • Assets commonly included in borrowing base include: • Accounts receivables • Inventory • Composition of borrowing base differs by transaction based on nature of the borrower’s business and assets • Less common borrowing base assets include real estate, equipment and intangibles (e.g., IP rights) 15 Copyright ©2018 Sullivan & Cromwell LLP Simplified Example of Borrowing Base Formula • Key determinants of borrowing base: • What types of assets are included? • Within each asset class, what assets are “eligible”? • What are the advance rates with respect to each class of assets? • A typical borrowing base formula might read as follows: “Borrowing Base” means, at any time of calculation, an amount equal to: (a) 85% of the book value of Eligible Receivables; plus (b) the lesser of (x) 70% of the Cost and (y) 85% of the Appraised Liquidation Value of Eligible Inventory; minus (c) the then applicable amount of all Reserves. • FILO tranches 16 Copyright ©2018 Sullivan & Cromwell LLP Borrowing Base: Eligibility • Eligibility criteria • Assets must satisfy eligibility criteria in order to be included in borrowing base calculation • Intended to exclude assets that pose higher collection risk and may not be easily sold in a foreclosure sale • Lenders push for more stringent eligibility criteria • Criteria vary based on type of asset (e.g., receivables, inventory, equipment, etc.) 17 Copyright ©2018 Sullivan & Cromwell LLP Eligibility: Receivables • Common eligibility criteria for receivables: • Receivables payable by a single customer may not exceed a specified percentage of the total borrowing base (concentration limits) • The receivable may not be past due by more than a specified number of days (usually 30, 60 or 90) • Amount of the receivable is not subject to an ongoing dispute with or offset by the customer • Receivable must be subject to a first-priority lien in favor of the lenders at all times • Frequent issues: • Concentration limits • Obligor issues • Credit card receivables 18 Copyright ©2018 Sullivan & Cromwell LLP Government Receivables • Receivables payable by the federal government are subject to the Assignment of Claims Act of 1940 • Creates procedural requirements for assignments of federal government receivables, including filing a specialized form • Government receivables typically carved out of borrowing base unless the borrower has taken all steps required under the ACA to effectively assign the receivable to the lenders • Several courts have held that failure to comply with ACA’s procedural requirements does not invalidate a security interest in receivables if otherwise properly granted and perfected under Article 9 of the UCC as between the borrower and its creditors • However, if ACA requirements are not followed, secured lenders would not be entitled to collect directly from the government and would have to rely on borrower to collect amounts and pay over to the lenders • Similar restrictions may apply to receivables payable by state or local governments under local law 19 Copyright ©2018 Sullivan & Cromwell LLP Healthcare Receivables • Medicare and Medicaid receivables are subject to 1972 federal legislation, which placed limits on healthcare providers assigning their rights to receive Medicare/Medicaid payments to third parties (the so-called “Anti-Assignment Provisions”) • Intended to prevent perceived abuse by third-party factor financing providers • Provisions have been subject of numerous court decisions and policy statement by CMS • Among other limitations, Medicare/Medicaid payments must be made directly to the healthcare provider, and cannot be paid directly into an account over which a lender has control • Legislation creates additional legal issues and complexity for healthcare receivable financings 20 Copyright ©2018 Sullivan & Cromwell LLP Healthcare Receivables Continued • These financings often use “double lockbox” structure to satisfy legal requirements while addressing lender desire for control of
Load more

Recommended publications
  • Gaining Popularity of Asset-Based Lending Overview and Background
    Hogan Lovells Gaining popularity of asset-based lending Overview and Background As the lending market continues to evolve and the need for financing from less than traditional banking sources increased as the willingness for businesses to consider a broader range of funding solutions, asset-based lending (ABL) has come to the fore. ABL has found itself in the position of becoming flexibility in executing operating plans without a significant part of the thriving FinTech and tripping restrictive financial covenants. Borrowing ShareEconomy industries – to such extent, terms and repayment schedules in ABL generally that it seems to promise a disruption to the status provide this flexibility and can be customized to quo in having access to credit as the lifeblood fit individual business requirements or business of business and economic growth. ABL, working cycles while allowing borrowers to monitor well for borrowers with greater financial leverage availability on a daily basis. and/or marginal cash flows, can be explained ABL per se refers to private financing with no quite simply. In a nutshell, a financing (granted securitized secondary market. As a strategy, in what ever form) based on assets and structured asset-based lending is premised on idiosyncratic to provide a flexible source of working capital by (essentially credit) risk transfer of the relevant monetizing assets otherwise sleeping on the balance assets. Its effectiveness hinges on a lender’s ability sheet. So whatever kind of assets a business has on to evaluate the ‘quality’ of the assets themselves its balance sheet (which can be quickly and easily (respectively soundness of the business model, liquidated) serves as collateral for the financing.
    [Show full text]
  • To Exploring Risk Mitigation Techniques in AR Based Financing
    Keys To Exploring Risk 5 Mitigation Techniques in AR Based Financing | 1 | Table of Contents Key #1 – A strong Initial Credit Decision 3 Credit policy and credit officer training – Beacons to guide your lenders Key #2 – Accurate and Timely Information 10 Exploring the types of information that are critical to success in all forms of asset based financing Key #3 – Controlling the Cash 17 Controlling the repayment stream in asset-based lending relationships Key #4 – establishing sound Monitoring Procedures 22 Maximizing both effectiveness and efficiency when attempting to monitor asset-based financing relationships Key #5 – Protection Against Changing Circumstances 28 Developing solutions that adapt well to a changing financing environment. | 2 | Key #1 – A strong Initial Credit Decision: Credit policy and credit officer training – Beacons to guide your lenders | 3 | “Begin with the end in mind.” That was a catch phrase made famous by Stephen Covey in 1990 and it would also qualify as one of the seven habits of highly effective lenders. When preparing to initiate any financing relationship, it is critical to begin with the end in mind. *According to the SBA, approximately six hundred thousand new businesses will start operations each year in the US and about 51% of these will survive more than five years. Many of these businesses will seek funding for short term capital during the first five years of operation, whether they fall into the 51% group that succeed or the other group that ceases operations or sells. It is, therefore, imperative that the bank have a plan for money going out and how it will come back even if things don’t go so well.
    [Show full text]
  • Grain Elevator Financing: Borrowing Base Reconciliation
    Grain Elevator Financing: Borrowing Base Reconciliation Where much is given, much is required, and this is certainly true with collateral audits. The recent market volatility has increased financial requirements for grain companies and may have brought higher levels of documentation. The collateral audit or borrowing base reconciliation typically occurs once a month unless the grain company is up against the lending limit or there is extreme volatility in the market. The overriding goal of the borrowing base report is to help the bank and the elevator work together to fund specific collateral positions, and clearly show each partner that they are living up to the agreed upon terms of the operating line. Each asset is given a predetermined advance rate based on the perceived risk of that asset. Advance rates are negotiable just like interest rates, and when the market rallies most elevators are not as concerned about the rate they are paying as long as the money is available to fund their position. GRAIN HEDGE POSITION REPORT Inventory numbers are typically obtained from Crop: Corn Date: Month End the Daily Position Record LONG POSITION SHORT POSITION or Grain Hedge Position In House (Total Grain on Hand) 400000 Report at the end of the In Transit month. The bank is Total Stocks & Inventory 400000 looking to finance grain Unpriced Inventory In-House Un-priced Sales Contracts - Undelivered Warehouse Receipt March 100000 inventory that is owned, Open Storage 100000 paid for , and properly Delayed Price hedged. To get Total Unpriced Inventory
    [Show full text]
  • How Bank's Use Reserves & Resources Reports in Debt Based Project Finance
    How Bank’s use Reserves & Resources Reports in Debt based Project Finance Prepared for the SPE Reserves & Resources Reporting Continuing Education Seminar 13th June 2016 Neil Fairnie, Standard Bank Group CE seminar; 13 June 2016 Reserves & Resources Reporting Contents 1 Section Slide Introduction 1. Oil and Gas Lending Products 6 2. Reserve Based Lending 9 3. Determining the Borrowing Base 15 4. The Redetermination Process 27 5. Relevance of a Typical Reserves Report to the Banking Case 31 Questions ? SPE London/SPEE Europe – CE June 2016: How Bank’s use Reserves & Resources Reports in Debt based Project Finance Neil Fairnie, Standard Bank Group Private and confidential Introduction SPE London/SPEE Europe – CE June 2016: How Bank’s use Reserves & Resources Reports in Debt based Project Finance Neil Fairnie, Standard Bank Group Standard Bank – for those who don’t know (or think we’re someone else …) 3 Investment Banking in Africa Our Presence Our People Standard Bank has an unrivalled Largest Pan-African footprint Dedicated Oil and Gas specialist teams in London, presence in sub- Johannesburg, Lagos, Nairobi and New York Saharan Africa with In-country connections and expertise on-the-ground Excellent Cross-Border Connectivity In-house petroleum engineer and ex-industry employees presence in 20 Local balance sheet Full range of expertise in-country through local teams African countries Operational overview Investment banking presence across the region and in key Over 150 years of experience in Africa markets strengthened by recent
    [Show full text]
  • Reserve-Based Lending International Considerations
    Reserve-based Lending International Considerations Andrew Haynes December 2017 RBL – International E&P Financing Tool • Reserves Based Lending (RBL) began in onshore Texas in the 1970s • RBL then developed in the UK North Sea in the 1970s and 1980s to finance large North Sea projects • Enables Oil & Gas producers to Leverage their Balance Sheets to meet planned Capital Expenditures • Lenders gain comfort – and security over – such assets as Proven Reserves and Production Facilities • RBL is a hybrid of project finance, corporate finance and asset-backed finance • Focus is on assets which are in Production or where Production is expected to commence shortly • Typically, involves Non-Recourse Loans the amount of which is based on the expected present value of future production from the field(s) in question, taking into account factors such as: • Level of Reserves • Expected Oil Price • A Discount Rate • Assumptions for Opex • Forecast Capex • Taxes and Royalties • Any Price Hedging employed • These elements are often quite variable – so there are periodic Borrowing Base redeterminations – which can see big swings (especially with large movements in oil & gas prices and supplier costs) • Different RBL Models have emerged in the U.S.A., North Sea and Internationally – with different Security packages to reflect local legislation and Operating environment risks 2 RBL Borrowing Base – Flexibility for All Parties Lender: Borrower: For RBL Lender: For oil and gas companies who are either in a development phase in which production is Risks associated with volatility in imminent or already producing oil and gas and commodity prices/market values for O&G need to fund expansion: assets is mitigated by the flexibility of RBL RBL provides an attractive and elastic Lender may continually adjust loan financing tool in which amounts available parameters upwards or downwards to are determined by expected production.
    [Show full text]
  • Redeterminig Borrowing Bases.Qxp
    WHITE PAPER Redetermining Borrowing Bases and Falling Prices: Where Discretion Meets Good Faith JOSH IMHOFF, PARTNER OIL AND GAS PRACTICE Carrington, Coleman, Sloman & Blumenthal, L.L.P. • 901 Main Street, Suite 5500 • Dallas, Texas 75202 • www.ccsb.com Redetermining Borrowing Bases and Falling Prices: Where Discretion Meets Good Faith By: Josh Imhoff, Partner OIL & GAS Executive Summary: Credit facilities tied to borrowing bases are common throughout the oil and gas industry. With the steep decline in energy prices, borrowing bases are likely to decline significantly when they come up for redetermination. In addition, many lenders now feel added pressure to pull in capital and be more conservative with their credit as a result of the current financial crisis. Although borrowing base loans typically give the lender wide discretion in revaluing borrowing bases, this discretion is not unfettered. When borrowing base redeterminations are challenged, the cases will often turn on whether the lender acted in "good faith" while setting the valuation. The meaning of the duty of good faith differs among jurisdictions. For example, the UCC and Texas have a standard that is relatively easy to satisfy so long as the parties abide by the express provisions of their loan agreement. On the other hand, in New York an implied duty of good faith and fair dealing underlies commercial contracts, including loan agreements, and this duty can potentially be violated even where the defendant has not violated any express provision of the agreement. In the context of borrowing base redeterminations, it is possible that a lender may violate the duty of good faith under New York law even though the loan agreement gives it wide discretion to set the valuation.
    [Show full text]
  • Signs of Fraud Commercial Finance Association 31 March 2006
    Signs of Fraud Commercial Finance Association 31 March 2006 by Jeffrey E. Brandlin, CPA Robert Beall, Esq. 1 FRAUD: WARNING SIGNS I. Fraud: The Warning Signs A. Focus on enterprise-wide fraud 1. Originates at the executive level of the borrower. 2. Two types a) "Pig thru a python." 1) Traditional or “old school” – pre-computerization type fraud; 2) Easier to spot; 3) Difficult to carry on for an extended period; 4) Usually smaller in scope than second type below. b) Fraud grafted on top of a real business a) Much more difficult to spot - on the surface - it is transparent; b) Carried on for years; and c) the worse news yet – it’s pervasiveness e) Usually much larger than (a), above. 2 FRAUD: WARNING SIGNS B. Indicia of fraud? External Market / Industry Factors: 1. Rapid or chronic sectoral and industry-specific downturns. - your borrower is bucking the trend, and you can’t figure out why. 2. Significant regulatory changes requiring major operational adjustments. 1) Your borrower is highly resistant and / or 2) Your borrower engages in delay tactics (SOX may be a precursor). C. The borrowing base 1. Credit line maximized consistently / minimal or no availability; 2. Liquidity problems / chronic cash flow shortages; 3. The company has frequent or chronic overdrafts; 4. Consistent financial default and waivers; 5. “Mysteries” and / or “stories” in the A/R or inventories; 6. Components of working capital are not moving together / aberrant movement; 7. Inventory in-transit is not reasonable e.g., it’s 60% of inventory; 8. The components of inventory and A/R are not aged or the aging is unreliable; 9.
    [Show full text]
  • Asset-Based Lending: Navigating the Borrowing Base, Article 9 Collateral Issues, and Key Loan Documentation Provisions
    Presenting a live 90-minute webinar with interactive Q&A Asset-Based Lending: Navigating the Borrowing Base, Article 9 Collateral Issues, And Key Loan Documentation Provisions THURSDAY, JANUARY 7, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Harvey C. Guberman, Partner, Ballon Stoll Bader & Nadler, New York Paul B. Hahn, Partner, Platzer, Swergold, Levine, Goldberg, Katz & Jaslow, New York Scott A. Lessne, Senior Counsel, Crowell & Moring, Washington, D.C. Jenny E. Cieplak, Counsel, Crowell & Moring, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-873-1442 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail [email protected] immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again. Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar.
    [Show full text]
  • Field Exams As a Cost-Effective Approach to Risk Mitigation
    RISKMANAGEMENT Field Exams as a Cost-Effective Approach to Risk Mitigation by Paul J. Schaefer he lengthy expansion in the U.S. economy has short- ened memories, leading to more generous credit Tstandards and greater chances for problem loans. The author’s field exam department performed 79 initial exams for mid- dle-market companies over the past three years. Serious risks were uncovered in a number of exams—risks that had not been caught by either the lender or the underwriter. This article, based on a review of the results of those exams, demonstrates the cost-effective nature of using field exams to mitigate risk. © 1999 by RMA. Schaefer is vice president and field examination manager for Bank One Asset-Based Finance Group South/West in Dallas. In addition to performing field exams for the bank's Asset-Based Finance Group, Bank One's field exam department performs due diligence, ongoing examinations, and trouble-shooting examinations for the commercial middle market, syndications, large corporate, and capital markets areas. 62 The Journal of Lending & Credit Risk ManagementNovember 1999 Field Exams ight years of an expanding and big audit firms to correctly Exam Results economy has resulted in provide information, don’t expect During the past three years, Ean overly competitive mar- the quality to improve with small- 79 initial exams were performed ketplace. Credit policies have er borrowers and smaller audit for middle-market companies. been rewritten beyond what once firms. The results of the exams were was considered essential for pru- Credit analysis is simple, if categorized into four groups with- dent lending.
    [Show full text]
  • Asset-Based Lending, Comptroller's Handbook
    Comptroller’s Handbook A-ABL Safety and Soundness Capital Asset Sensitivity to Other Adequacy Quality Management Earnings Liquidity Market Risk Activities (C) (A) (M) (E) (L) (S) (O) Asset-Based Lending Version 1.0, March 2014 Version 1.1, January 27, 2017 Office of the Comptroller of the Currency Washington, DC 20219 Version 1.1 Contents Introduction .......................................................................................................................................... 1 Overview ................................................................................................................................... 1 Advantages ...................................................................................................................... 2 Disadvantages .................................................................................................................. 2 ABL Structures ................................................................................................................ 3 Risks Associated With ABL ...................................................................................................... 4 Credit Risk ....................................................................................................................... 4 Operational Risk............................................................................................................... 5 Compliance Risk .............................................................................................................. 5 Strategic
    [Show full text]
  • BORROWING BASE Adoption of the UCC Principles in Establishing a Borrowing Base
    BORROWING BASE Adoption of the UCC principles in establishing a Borrowing Base GENERAL APPROACH FacB Definition Asset protection lending takes its ultimate justification in the banks confidence that it will be adequately protected against loss by the liquidation value of the firm’s assets. In unsecured asset protection lending, protections is judged to be adequate when, as indicated in the pro-forma liquidation analysis, true working capital provides a cushion sufficient to absorb shrinkage in the value of the firm’s assets. When true working capital does not provide an adequate cushion of protection, the bank may lend on a secured basis and achieve asset protection by establishing and maintaining a secured claim against specifically pledged asset that are of sufficient value to repay the bank in liquidation. Since the net realizable value of assets in liquidation will be less than face value for various reasons (uncollectible receivables, price, declines for commodities, liquidations expenses, etc.), the bank in order to secure protection in secured lending, attaches margins to specific collateral to accommodate the risk of shrinkage and lends only that amount against the value of the collateral that is likely to be recovered in liquidation. The maximum the bank is willing to lend based on the value of the collateral in the collateral pool is called the borrowing base. The borrowing base is determined by the lending margins set against each type of collateral; the actual dollar value of the borrowing base depends on the value of the collateral in the collateral pool at a specific point of time. When the collateral consists of inventory and/or accounts receivable that are in a continual process of liquidation and replacement, the borrowing base must be closely monitored and calculated at frequent intervals in order to control the amount borrowed and ensure that an adequate cushion of protection is maintained.
    [Show full text]
  • Accounts Receivable and Inventory Financing
    A-AR Comptroller of the Currency Administrator of National Banks Accounts Receivable and Inventory Financing Comptroller’s Handbook March 2000 A Assets Accounts Receivable and Inventory Financing Table of Contents Introduction Overview 1 Risks of Accounts Receivable and Inventory Financing 3 Credit Risk Rating Considerations 4 Types of Accounts Receivable and Inventory Financing 6 Accounts Receivable and Inventory Financing Structures 7 Revolving Credit 7 “Permanent” Working Capital 8 Seasonal Operating Advances 10 Over-advances 11 Term Debt 13 Evaluating the Borrower 14 Assessing the Borrower’s Financial Position 14 Assessing the Borrower’s Operating Cycle 15 Assessing the Borrower’s Industry 17 Assessing the Borrower’s Management Team 17 Evaluating Collateral 17 Accounts Receivable 17 Inventory 20 Underwriting ARIF Loans 22 Collateral Controls in the Loan Agreement 22 Documentation 23 Financial Covenants 25 Third-Party Guarantees or Insurance 26 Pricing 26 Administering ARIF Loans 27 Disbursing Revolving Loan Advances 28 Monitoring Systems 28 Specialty Financing Arrangements 31 Structured Finance 31 Debtor-in-possession Financing 32 Factoring 33 Third-Party Vendors 34 Comptroller’s Handbook i Accounts Receivable and Inventory Financing Compliance Issues 35 Debt Liquidation and Lender Liability 35 State and Federal Laws, Rules, and Regulations 35 Allowance for Loan and Lease Losses 36 Examination Procedures 37 General Procedures 37 Quantity of Risk 40 Quality of Risk Management 49 Conclusions 56 Appendixes 58 A. ARIF Summary Chart 58 B. Trade Cycle Analysis Worksheet 59 C. Adverse Risk Rating Examples 60 Glossary 69 References 75 Accounts Receivable and Inventory Financing ii Comptroller’s Handbook Accounts Receivable and Inventory Financing Introduction This booklet describes the fundamentals of accounts receivable and inventory financing (ARIF).
    [Show full text]