ABL loan agreements also tend to have default events that a borrower may not see in other types of credit facilities. Sticking to the issue of safeguards is key; A lender may include default events related to a large customer contract or a large amount of cancelled orders or uncollected receivables. As an advisor to the borrower, try to remove these provisions, as these types of events would inevitably affect the credit base. Otherwise, the lawyer should try to negotiate the highest possible thresholds to avoid triggering a default. It is one thing for a lost customer to cause a decrease in the availability of the credit base, but another that this loss causes a default event under the ABL loan agreement. Asset-based lending involves lending money under an agreement secured by collateral. An asset-based loan or line of credit can be secured by the borrower`s inventory, accounts receivable, equipment or other real estate. ABL literally stands for asset-based loan; Therefore, it is not surprising that the basis of any ABL facility is the assets that support the credit base. Unlike a cash flow facility, where lenders review the borrower`s future cash flows, the availability of the loan in an ABL facility is determined by the quality and value of the core assets borrowed, typically eligible inventory and eligible claims (and sometimes eligible equipment).
With this type of facility, lenders are usually very interested in ensuring that the assets they lend to are of good quality and easily accessible in the case of inventory, and are likely to be recovered in the case of receivables. This focus can lead to detailed reporting requirements, both in terms of range and frequency. For example, a lender may want the borrower to report the value of eligible assets, aging accounts receivable, aging suppliers, and inventory status reports on a weekly or monthly basis. These requirements are onerous for borrowers, many of whom have too thin cash flow staff. However, there are some ways for lawyers to help their clients create a culture of compliance to avoid failures. These techniques can be used in the term sheet phase, in loan agreement negotiations, and throughout the term of the loan. This may seem obvious, but don`t overlook the security agreement. Even though business people don`t usually focus on the security agreement, there can be a variety of issues hidden in an ABL security agreement.
Often, lenders bury termination obligations and various more onerous clauses in the security agreement, particularly with respect to receivables. For example, a security agreement may prohibit the borrower from adjusting, assigning or modifying receivables. For many borrowers, this standard is too strict to work for their business. To increase compliance success, move all reporting requirements to the notification section of the loan agreement and make sure the documents work together. After the transaction is completed, create a compliance checklist for the borrower that summarizes in simple terms what the borrower can and cannot do to comply with their ABL loan agreement. Include regular and event-based reporting requirements as well as negative operational commitments. Integrating these requirements can be a valuable tool for borrowers as they navigate through the sometimes overwhelming number of obligations included in ABL loan documents. In addition, the lawyer should consider keeping an ongoing list of compliance issues raised by clients. This list would be useful to address general or recurring compliance concerns prior to any changes or refinancings.
When negotiating a loan agreement, several factors, including the risk profile or creditworthiness of the borrower, affect the extent of the positive, negative and financial obligations imposed on the borrower. Some of the most expensive loan agreements are asset-based loan agreements (ABL). The heart and soul of ABL loans are the guarantee; As a result, ABL loan agreements often provide intensive monitoring and surveillance of lenders, as the credit base is tied to “appropriate” assets. In such a strict regime and without good advice from a lawyer, it is not uncommon for borrowers to trigger an involuntary default. The objective of this article is to provide an overview of ABL loan agreements and describe several best practices in negotiating ABL credit facilities on behalf of borrowers in order to avoid unintentional foot error defaults. Borrower advisors should advise their clients on potential compliance issues early in the early stages of financing – ideally when the company is negotiating a condition sheet for a proposed credit facility. Condition sheets typically list the aggregate eligibility requirements, insurance, notices, financial covenants, negative covenants, and default events that a borrower can expect in their ABL loan agreement. It is therefore crucial that the lawyer focuses a client`s attention on important operational issues when negotiating a condition sheet, especially when these restrictions are likely to apply for the next four or five years. Counsel should suggest that clients clearly define the terms to be used in calculating availability, eligible claims, eligible inventory, reserves and other important provisions. In addition, as expected, ABL`s facilities generally offer little flexibility for the sale of assets outside the normal course of business. If the borrower has reflected assets in their business plan, the lawyer should point out that these assignments are expressly authorized on the condition sheet.
By discussing important business issues in advance when negotiating the condition sheet and not after the lender`s lawyer has drafted the loan agreement, the lender has a clearer understanding of the borrower`s key business factors that affect the terms of the transaction, making the processes of marketing the transaction and accepting the final documents much smoother. Since lenders participating in multi-lender facilities may not see the full loan agreement until a few days before closing, it is important to ensure that fundamental business issues are considered in the early stages of negotiations to prevent credit approval issues from arising at the last minute. Since ABL facilities often include detailed reporting requirements, a borrower should link all termination obligations to a monthly or quarterly financial report. For example, instead of requiring written notice of a new collateral location ten days in advance, the attorney could review the agreement so that the borrower notifies all new collateral locations with the monthly or quarterly financial/compliance certificate. Better yet, add a materiality threshold to the notification requirement so that only sites whose warranties exceed a significant amount must be disclosed. To do this, the officer responsible for completing the monthly declaration file will have to disclose any significant new warranty locations. If the lawyer structures the ABL loan agreement in this way, the borrower is less likely to forget to make the required notice period. The same approach can also be used for other communications (e.g.
B notices of new bank accounts, industrial tort claims and intellectual property). Whether ABL is the right choice for your business depends on a thorough review of your needs, the nature of your business, your current situation, and your plans for the future. With ABL, a lender focuses primarily on the value of your company`s assets, which are used as collateral to secure a loan. At the top of the list are accounts receivable; As a general rule, only short-term claims (those that are less than 90 days from the invoice date or not more than 60 days late) are taken into account. This is followed by assets such as inventory, machinery and equipment, real estate and intellectual property. Such an escrow agreement may involve the use of an unrestricted subsidiary and shall be structured in such a way as to comply with the existing ABL agreement, the existing credit agreement, the existing documents for the second privilege, the credit agreement with term loans and the bridge credit agreement of the first privilege. With ABL, a wide range of your company`s assets – from accounts receivable and real estate to brands and intellectual property – can serve as collateral and free up the capital they need. If your business has significant assets, ABL can provide access to significant financing with a lightweight structure while providing flexibility in future decisions that may not be possible with other types of loans. Special arrangements such as FILO tranches (for “first in, last out”) could increase the amount you can borrow.
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