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Asset-Based Lending: Navigating the Borrowing Base, Article 9 Collateral Issues, and Key Loan Documentation Provisions

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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. 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. 35. 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 the Borrowing Base, Article 9 Collateral Issues and Key Loan Documentation Provisions Panelists: Jenny E. Cieplak [email protected] Harvey C. Guberman [email protected] Paul B. Hahn [email protected] Scott A. Lessne [email protected] 5 I. Overview – The Role of Asset-Based Lending A. Provides working capital B. Finances the most liquid assets in the borrower’s business 1. Liquidity spectrum – cash, receivables, inventory, machinery and equipment, real estate C. Forms of loan facilities 1. Revolving credit – committed and uncommitted 2. Floor planning facilities 3. Factoring arrangements 6 II. Overview – Collateral A. Asset-based lending is a subcategory of secured lending B. How much a lender will be willing to lend at any one time is governed by the quantity and quality of the assets securing the loan C. The concept of “eligibility is at the heart of the ‘borrowing base’” – the calculation used to determine how much is appropriate to lend 7 D. The definitions of eligibility and borrowing base formula limitations reduce the amount of cash advances available to a borrower, based on its total pool of accounts and inventory 1. Lenders will not lend dollar-for-dollar 2. Establishing a balance between collateral quality, collateral value and lending level is critical and will vary from loan to loan Total Pool of Assets Perfected Security Interest Eligibility Criteria Borrowing Base Limitations Cash Advance Availability 8 III. Article 9 Requirements for Collateralizing an Asset-Based Loan A. The basics of obtaining a security interest in personal property 1. Attachment 2. Perfection a. Filing a financing statement b. Automatic perfection upon attachment for: i. Limited assignments of payment intangibles and promissory notes; ii. Sales of payment intangibles and promissory notes; and iii. The assignment of healthcare insurance receivables, if the assignment is made to the healthcare provider that provided the healthcare goods or services c. Control d. Possession 9 IV.Priority A. If two competing security interests are both perfected by filing, the first to file has priority B. If one security interest is perfected by filing and the other by possession, the first to perfect has priority C. Additionally, the time of filing or perfection is deemed the time of filing or perfection as to the proceeds (UCC §9-322(b)) D. Intercreditor arrangements may vary priority 10 V. Enforcement A. State law remedies 1. Article 9 remedies such as retention in full or partial satisfaction self-help; repossession and disposition 2. Replevin (other names may apply) where self-help is not available 3. Injunctive or prejudgment remedy relief to prevent the movement or other disposition of assets 4. Assignment for the benefit of creditors – common law and statutory 5. Compositions and forbearance arrangements 11 B. Article 9 remedies 1. Determine if a default has occurred 2. Secured party’s rights: Part 6, revised Article 9 a. The right to dispose of collateral by sale, lease, license or the like b. Retain collateral in full or partial satisfaction of the debt c. Collect payments from account debtors or others obligated on collateral 3. Surplus goes back to the debtor; debtor is liable for deficiency unless transaction was a “true sale” of a payment stream 12 4. Rights and duties of secured parties after default: 9- 601 a. Proceed under Article 9 b. Exercise contractual remedies c. Use the courts 5. Self-help repossession a. Secured party may not breach the peace; cannot be waived by the debtor 6. Consensual relinquishment of collateral to secured party 13 7. Possession and disposition after default (9-609 through 9-614) a. “foreclosure” by secured party sale i. Public sale vs. private sale ii. Every aspect of disposition must be “commercially reasonable” iii. Notice Requirements b. Collections of payment streams (9-607) i. Direct notification to account debtors c. “Strict foreclosure” (9-620 through 9-622) i. Secured party and debtor may agree after default that secured party may retain collateral in full or partial satisfaction of the debt 14 VI. Inventory A. “Inventory” shall mean and include as to Borrower, or as to any third party, all of Borrower's or third party's now owned or hereafter acquired goods (other than equipment), merchandise and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all Raw Materials, Work In Process, Finished Goods and materials and supplies of any kind, nature or description which are or might be used or consumed in Borrower's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. 15 1. If the borrower sells it in the ordinary course of business, it is Inventory, if the borrower uses it in its business it is equipment 2. “Goods” – which covers all things that are movable when a security interest attaches describes, among other things both inventory and equipment 3. “Value” shall mean, as determined by lender in its sole credit judgment, with respect to eligible inventory, the lower of (i) its cost computed on a first- in first-out (FIFO) [Last in first out (LIFO)] basis in accordance with GAAP; or (ii) its market value 16 VII.General Eligibility for Inventory A. Inventory shall mean and include, with respect to borrower, inventory consisting of finished goods owned by and in the possession of borrower and located in the United States of America, which lender, in its sole credit judgment, shall determine to be eligible inventory, based on such considerations as lender may from time to time deem appropriate 17 1. Without limitation, inventory shall not be deemed eligible unless such Inventory is subject to lender's first priority perfected security interest and no other lien (other than permitted encumbrances) 2. In addition, no Inventory shall be eligible inventory if: a. it does not conform to all standards imposed by any governmental agency, division or department which has regulatory authority over such Inventory or its use, sale or distribution, including but not limited to the Federal Fair Labor Standards Act of 1938 as amended, and all rules, regulations and orders thereunder; b. It consists of showroom samples, "seconds," packaging, supplies or catalysts; 18 c. it constitutes Inventory in-transit to borrower (while in- transit); d. it is subject to any licensing or similar contractual arrangement limiting the resale thereof by borrower or by lender as its attorney-in-fact unless a waiver satisfactory to lender is obtained from any such licensor; e. any covenant, representation or warranty made by the borrower with respect to such inventory has been breached in any material respect; f. it is obsolete, slow-moving or otherwise not merchantable; g. it has been consigned to borrower or to any third party for sale; h. it is not subject to a perpetual inventory reporting system acceptable to lender; 19 i. it is in the possession or control of any processor, finisher or other third party besides borrower or is otherwise situated at any public or private warehouse or upon any leased property unless such processor, finisher, warehouse operator, landlord or other third party has waived any lien or claim thereon, in a manner satisfactory to Lender, or lender, in its credit judgment has elected to impose reserves against the value of such inventory in lieu thereof (the amounts and duration of which shall be in Lender's sole credit judgment); or j.
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