casemark/structuring-asset-based-lending

Structuring Asset Based Lending

Designs ABL facilities with borrowing base calculations, collateral eligibility criteria, and field exam requirements.

When To Use

• Structuring a new ABL revolving credit facility or term loan secured by working capital assets
• Calculating borrowing base availability against accounts receivable, inventory, or other eligible collateral
• Evaluating collateral pool quality and setting eligibility criteria for a prospective borrower
• Analyzing advance rates, reserves, and availability blocks for an existing or proposed facility
• Preparing for or reviewing field examination findings and their impact on borrowing capacity
• Comparing ABL structures across competing lender proposals or refinancing scenarios

Inputs To Gather

• Financial statements: Trailing 12-month P&L, balance sheet, and cash flow statement; most recent monthly/quarterly interim financials
• Accounts receivable aging: Detailed AR aging schedule (current, 30, 60, 90, 90+ days) with concentration by obligor, cross-aging percentages, and dilution history (credits, returns, allowances)
• Inventory reports: Perpetual inventory or recent physical count broken out by raw materials, WIP, and finished goods; obsolescence reserves; NOLV (net orderly liquidation value) appraisal if available
• Existing credit agreements: Current facility terms, liens, intercreditor arrangements, and any subordination agreements
• Collateral-specific data: Equipment appraisals, real estate valuations, IP schedules, or other hard-asset detail if part of the borrowing base
• Industry context: Sector-specific risk factors (e.g., perishability, fashion risk, commodity price exposure) that affect advance rates
• Field exam reports: Most recent field exam or collateral audit findings, including any identified discrepancies

Workflow

1. Profile the borrower and collateral pool

   • Classify collateral types: eligible AR, eligible inventory (by sub-category), equipment, real estate, other
   • Identify revenue concentration risks — flag any single obligor exceeding 10–15% of total AR
   • Assess inventory composition and turnover; distinguish between readily liquidatable finished goods and slow-moving or specialized WIP

2. Set eligibility criteria

   • Define AR eligibility: exclude past-due beyond 60–90 days [VERIFY against lender policy], cross-aged accounts (typically >50% past due triggers full exclusion), foreign receivables without credit insurance, affiliate/intercompany receivables, contra accounts, and government receivables subject to assignment restrictions
   • Define inventory eligibility: exclude consignment goods, bill-and-hold, in-transit beyond a threshold, obsolete or slow-moving stock (>12 months aged), and categories with no NOLV appraisal
   • Document any borrower-specific carve-outs or negotiated exceptions

3. Calculate the borrowing base

   • Apply advance rates to each eligible collateral class:
     • Eligible AR: typically 80–85% [VERIFY — varies by industry and credit quality]
     • Eligible inventory (finished goods at NOLV): typically 50–70% of appraised NOLV
     • Eligible inventory (raw materials): typically 40–60% of cost
     • Equipment/RE (if included): per appraisal, usually at forced liquidation value
   • Subtract reserves: dilution reserve (formula-based on trailing dilution %), rent reserve (3 months of landlord exposure if no SNDA), availability block or minimum excess availability requirement, and any springing reserves tied to financial covenants
   • Compute gross availability, net availability, and excess availability after outstanding loans and letters of credit

4. Structure facility terms

   • Size the commitment relative to peak and trough borrowing base projections (seasonal modeling)
   • Set financial covenants: springing fixed charge coverage ratio (typically 1.0x–1.1x, triggered when excess availability falls below a defined threshold, often the greater of a fixed dollar amount or 10–12.5% of the line cap) [VERIFY threshold conventions with lender]
   • Define reporting requirements: monthly borrowing base certificates, quarterly financials, annual audited financials, and periodic collateral reporting
   • Establish field exam frequency: typically 1–2x per year under normal conditions; accelerated to quarterly if a triggering event occurs (e.g., excess availability falls below threshold)

5. Stress-test and scenario analysis

   • Model borrowing base under downside scenarios: AR collection slowdown (+15–30 days DSO), inventory write-downs (10–20% NOLV decline), customer concentration loss, dilution spike
   • Assess whether the facility remains adequately available under stress — minimum excess availability should cover at least 60–90 days of operating cash burn
   • Identify structural mitigants: blocked-account arrangements (springing vs. hard), cash dominion triggers, and LC sub-facility sizing

Output

• Borrowing Base Model: Spreadsheet-ready calculation showing eligible collateral by category, advance rates applied, reserves deducted, and resulting availability
• Eligibility Criteria Summary: Clear table of inclusion/exclusion rules for each collateral class with rationale
• Facility Term Sheet Markup: Key commercial terms including commitment size, advance rates, reserves, covenants, reporting, and field exam requirements
• Scenario Analysis: Sensitivity tables showing availability under base, downside, and severe stress cases
• Risk Flags: Highlighted concentration risks, unusual dilution patterns, inventory quality concerns, or structural gaps requiring lender negotiation

Quality Checks

• Confirm advance rates and eligibility criteria are consistent with current market conventions for the borrower's industry [VERIFY against recent comparable ABL transactions]
• Validate that the borrowing base arithmetic ties — gross eligible collateral minus ineligibles, times advance rate, minus reserves equals net availability
• Ensure dilution reserve formula is internally consistent with trailing dilution data provided
• Cross-check that springing covenant thresholds and cash dominion triggers are aligned (they should reference the same or coordinated availability thresholds)
• Verify that field exam frequency and reporting cadence match the risk profile — higher-risk or seasonal borrowers warrant more frequent monitoring
• Confirm all [VERIFY] items are flagged for lender counsel or credit committee review before final structuring