By Phil Neuffer
Every asset-based lender brings a different set of criteria to the table when examining a potential deal. In a panel at the 13th Annual Philadelphia Credit & Restructuring Summit, four different financing providers outlined their own unique perspectives on deal evaluation.
With the breadth of lenders in the asset-based lending industry, there is no one way to structure a deal. This sentiment was on full display in the second panel of the 13th Annual Philadelphia Credit & Restructuring Summit, which was held March 24 in Philadelphia. In the panel, representatives from four different types of financing providers shared their unique approaches to the market using a test case provided by moderator Paul Shur, a shareholder at Becker & Poliakoff. Shur said the purpose of organizing the panel and selecting its panelists was to give each lender the opportunity to discuss their respective companies and “market” their businesses.
For this exercise, the panelists were asked to evaluate a potential deal with a toy manufacturer that produces its own products and also purchases from foreign manufacturers. The company had a $20 million working capital loan with its current lender, a regional bank. Shur further detailed that the fictional company has trademarks and is branching into e-commerce, but despite having some availability on its loan, it needs more cash as it looks to do more of its own production, particularly at its own facilities. Unfortunately, its current lender will not lend, perhaps due to the tripping of some covenants, including its fixed charge coverage ratio.
Four Unique Deals
Each of the lenders then provided a bird’s eye view of their approach to this potential borrower.
Meredith Carter, representing Context Business Lending as its president and CEO, said Context would offer a revolving line of credit to the borrower without minimum capital funds or an availability block. The offer would also include up to 90% on accounts receivable, 60% on inventory and up to 75% on real estate, with a total loan amount of $35 million.
Rob Martucci, executive vice president and national sales manager for the asset-based lending group at Rosenthal & Rosenthal, outlined a smaller deal, indicating a total of $25 million made up of a $15 million revolver and a $10 million term loan with a borrowing base of 85% against A/R and 60% against inventory, making for availability of approximately $10 million after the borrower paid off its current lender. In addition, due to the potential seasonality of the business, Martucci said Rosenthal would consider offering a stretch piece by leveraging the intellectual property, M&E and real estate further for a certain date range, possibly from July to August when the company may be ramping up its inventory to prepare for the holiday season. Martucci added that a transaction like this could be handled by either Rosenthal’s factoring or asset-based lending division depending on the borrower’s ultimate need, while Rosenthal’s purchase order finance division would also be a great alternative for additional liquidity.
Gerber Finance would also lend in this instance, with Jennifer Palmer, CEO of the company, outlining a deal of $40 million, with the potential for an accordion feature bumping it up to nearly $50 million. Palmer said Gerber would go with 85% on A/R and might even throw in an extra $7.5 million against the company’s trademarks, particularly with Gerber’s belief in the value of brand names and IP. Palmer also addressed the previous lender, saying Gerber would need to evaluate the status of the relationship but would expect any cash management to stay with the existing bank.
Lastly, John DePledge, head of ABL at Bank Leumi USA, brought the bank perspective to this deal, outlining the architecture of a $35 million deal, consisting of a $25 million revolver and a $10 million term loan backed by real estate. DePledge was the only lender to ask for a personal guarantee; however, it was limited by a pledge of the owner’s stock in the borrower. DePledge and also said he’d like a first priority security interest against all business assets and a first mortgage on the real property owned by an affiliate and leased to the borrower. Most of the other lenders on the panel do not look for guarantees, although Martucci said Rosenthal does take fraud guarantees and rarely gets pushback on such terms. Returning to DePledge’s offer on the test case, he also said he’d do 90% against eligible credit-insured A/R and 85% against all over A/R, while going with 85% against net orderly liquidation value of inventory, machinery and equipment, and 75% against the fair market value of real property.
Differences and Similarities
Despite the difference in deals, the lenders were in a similar ballpark when it came to the ratio of term debt vs. revolving debt. Palmer and DePledge both said they shoot for term debt to be about no greater than one-third of the total financing package, with Carter going as high as 50%, although she said lower is better. Martucci didn’t give a specific number, but agreed that having less term debt is best.
How each lender viewed inventory in this deal was based heavily on how to separate it, particularly inventory with Amazon. As Palmer noted, lenders have to work with the Amazon system to be competitive, but in her deal, she said she’d carve out the Amazon inventory and go with a 60% to 65% advance rate on inventory. Martucci also explained that Rosenthal is comfortable working with Amazon inventory, with “zero dilution” (as Amazon usually advises how much is being paid before actually being invoiced), based on his experience on such transactions.
The discussion about Amazon inventory led to a wider conversation about e-commerce, which was included as part of the borrower’s plan. As DePledge noted, “[e-commerce] will keep evolving and we have to evolve or be extinct.” For companies like Gerber, Context and Rosenthal that have dedicated e-commerce platforms and years of experience in the market, this is a key part of their strategy when evaluating a potential lending opportunity.
In terms of the amount offered in this test case, there was no uniformity, with Gerber offering nearly $50 million if you include a potential accordion, while Rosenthal’s initial offer would come in at about $25 million. As Palmer explained, Gerber wouldn’t hold all $50 million on its balance sheet (although she wishes it could). Instead, Gerber would hold $15 million, its shareholders would hold another $15 million to $20 million and it would look to partner with another lender or lenders for the rest. Martucci similarly would look to bring in a participating lender or lenders if the company needed more than $25 million.
Carter brought the importance of evaluating the company’s ability to service its debt to the table, especially since the borrower in this test case was making some of its projections based on manufacturing it had only just begun. Carter says Context would ensure the debt could be serviced with the manufacturing piece taken out before extending an offer. Palmer would conduct a similar process and said Gerber would specifically look for who will handle the plan and what their experience is like. Palmer also said performing a key sensitivity analysis would be important to determine if the company can service its debt even if its projections miss the mark by a significant amount.
As outlined in the test case, the borrower also had some M&E considerations. On the equipment side, Martucci said the deal Rosenthal would offer would have a two-to-three-year term, with a balloon payment due at the end of the third year since it usually runs its amortization of equipment over four to five years. Carter said Context would go three to five years on the equipment and 10 years on real estate, while DePledge said Bank Leumi would go with five to seven years on the equipment and up to 20 years on the real estate.
Regardless of the dollars and cents of each potential deal, all the lenders on the panel agreed that it’s important to do what you say in any relationship and that rushing to get a proposal out is rarely the best course of action. As Palmer explained, there have been “some really interesting surprises” during the field exam stage on some recent deals, which she says is “probably indicative of the market.”
“People’s backs are starting to get against the wall and they’re feeling the crunch within their business. And people make bad decisions and they cover things up,” Palmer said.