An asset based loan (ABL), as it applies to Capital City Bank (CCB), is generally a loan to help fund a company’s working capital needs that are driven in usual circumstances by the need to satisfy current liabilities at times when cash on hand is not fully available to do so. An ABL is typically secured by a lien on the company’s Accounts Receivable (A/R) and Inventory, but in most cases loan advances are limited to those supported by the company’s A/R only. The reason we do not routinely advance on inventory is due to that asset being further removed from being converted to cash than a receivable. Remember, it is cash that repays our loan.  

For policy details see Asset Based Lending Policy.

Capital City Bank structures an ABL as a revolving line of credit (LOC) with a floating rate.  

The rate usually ranges from Prime + 0% to Prime + 2.5% with a typical rate for a typical profile being Prime + 1%. In all cases we will establish a floor rate that, as of this writing, is 5.0%, but is subject to change.  

Any ABL exposure of $250,000 or more is required to be monitored by Working Capital Finance and comes with an appropriate annual monitoring fee.  

It is very important to recognize that there is much more to properly analyzing an ABL credit than “the line has received good usage and the Debt Coverage Ratio (DCR) is 1.64X”.  

Normal financial events that can drive ABL usage:

• Timing differences between the collection of A/R and the need/desire to pay Accounts Payable (A/P). This is what we hope we are financing.
• Growth in sales without a like growth in company capital (which is almost always the case).
• Seasonally slow A/R and Inventory Turn Times as well as faster A/P turn times.

Undesirable financial events that can drive ABL usage:

• Net losses 
• Excessive company distributions to owners and/or related parties.
  • Remember capital distributions can be in the form of salaries to the owners, loans to shareowners or related parties and dividends.  

• Company using too much of its cash to purchase long-term assets (non-working capital).

Develop and construct a narrative that gives much more meaning than spitting out a Debt Coverage Ratio (DCR) and line usage information augmented by “this went up and this went down”.  This is a very good loan type, maybe the best, to let the Committee know you are a good analyst and worthy of being in the coveted commercial analyst group.

• Detail line activity over the last 12 months.
  • Any stale balance should be addressed in the narrative.
  • Also note whether or not the line is hooked to the client’s DDA with a sweep function.  
  • Line balances that stay in the upper range of availability can somewhat be justified if the client has good CCB deposits yet the deposit account does not sweep to the line.
• Current Borrowing Base Certificate.  
  • This can be obtained in Abrigo in the document portal.
• Reconcile most recent balance sheet A/R balance to Borrowing Base Certificate.  
  • Any material differences should be addressed.

• The loan should be conditioned upon the outstanding balance being limited to the lesser of that supported by the Borrowing Base Certificate or the outcome of (Cash + A/R + Inventory + Costs in Excess of Billings – A/P – Billings in Excess of Costs).  
• Highlight if the borrower is a subcontractor.  
  • Subcontractors are further removed from the repayment source than a general contractor would be and introduce more risk.
  • Any subcontractor needs to have especially strong financials for us to tender an ABL.  Also, financial covenants may be more pertinent with a subcontractor. 

• Discuss A/R, Inventory and A/P turn times and how they compare to industry averages.
• A general rule of thumb for calculating the level of need for an ABL is ((A/R Days + Inventory Days –  A/P days) / 365)) X full year sales.  
  • This is just a rule of thumb as a financing need will be impacted by accruals and non-vendor payables and perhaps most notably the level of cash the client opts to retain on its balance sheet.  
  • A company that carries large cash balances will of course have an ABL need that is less than the outcome of the equation above.  
  • It is important to keep in mind that the turn time calculations are in part driven by the balance sheet which is just a snapshot of the company’s financial condition on a single day.  
  • The turn time calculations for one day of the year will be different from turn times calculated for another day of the year due to fluctuations in working capital asset and liability balances. For example: A business that has a concentration of sales at Christmastime will likely have higher than normal receivables, lower levels of inventory and higher levels of payables at 12/31. At 9/30 you might expect low levels of A/R, higher levels of Inventory and growing levels of A/P as inventory increases.  
• Verify that the Borrowing Base Certificate has been completed properly.  
  • Make sure the advance rates are calculated correctly and concentrations have been appropriately considered.
• In the rare case where we advance against inventory, make sure the advance rate is correct (typically 50%) and the cap has been honored.  
  • When we advance against inventory there is typically a dollar cap that can be supported by this asset type. Also, our advance rate on inventory may be a generic 50%, but keep in mind that different inventory stages will have different values.  
  • If we are loaning money to a company that makes steel furniture, the raw materials (steel) and finished goods will have a higher value to us than work in process.
• Need to discuss what is driving the need for the line and why the history of usage has been what it has.  
  • The income statement is certainly important in analyzing an ABL, but usually the real meat of what is really going on is disclosed by the balance sheet.
• Consider whether or not we should have financial covenants on the line.  
  • Covenants are good with any ABL, but especially so when the guarantor(s) do not offer the support we might like relative to the size and nature of the line. Also, subcontractors typically deserve financial covenants. 

• At renewal, any changes in pricing, feed, advance rates, etc. shall be disclosed at the beginning of the memo.
• Loan Summary
  • All preexisting loans over $500M should be briefly discussed in the narrative.

• Deposit Summary
• Line usage history over the last 12 months.
  • Any staleness should be highlighted and discussed.
• If the line is subject to an annual 30-day clean-up, make sure we disclose.  
  • We have a number of ABL’s that are subject to a 30-day clean-up that should not have that requirement.  
  • Generally speaking, only seasonal businesses (for example: farm, businesses with sales concentrated around Christmas, Halloween) should be subject to a clean-up requirement. If we do not think the line should have this feature, recommend it be abolished.

• Disclose if borrower is a subcontractor.
• If applicable, test financial covenants and document in the memo.
  •   Any non-compliance should be discussed and disclosed.

• Most recent borrowing base certificate should be in memo.
• Reconcile most recent balance sheet to a like-dated borrowing base certificate.  
  • Material differences between the two documents should be explored and described.
• In the financial narrative, include a discussion of the trade account turn times and how that compares to industry standards.  
  • Pay attention to unusually slow A/R and Inventory turn times as that might hint at issues.
• Include the “rule of thumb” ABL need calculation:  
  • ((A/R Days + Inventory Days –  A/P days) / 365)) X full year sales.
  • This will often be a number that will be materially different than the ABL request due to a number of factors, most prominent being cash levels that are retained in the business which will reduce the ABL need.  
  • If the ABL seems to be excessive, make that notation.
• Pay close attention to any company distributions – whether by loans, dividends, or officer pay.  
  • If the sum of dividends and increased loans to related parties exceed net income, this needs to be highlighted as company capital is being depleted.
• Discuss briefly the financial support from the guarantor(s).  
  • It is very important to look for company cash on his or her PFS. If there, make note and discount the double-counting.
• If there are more than three guarantors, direct the reader to the Abrigo PFS summary table. 
  • Too much time is being spent on long narratives describing what can be read on the guarantor’s balance sheet. That is not to say we shouldn’t highlight important items in narrative form.