Case 042Asset-backed, project and real-asset lendingCore
Compute the borrowing base for Samvera Distributors: receivables of Rs 400 crore and inventory of Rs 300 crore across raw material, work in progress and finished goods, against a Rs 350 crore asset-based line. What is available?
1The situation
Samvera Distributors distributes electrical components and assembles some kits in-house. It has a Rs 350 crore asset-based revolving line. Receivables are Rs 400 crore, of which Rs 60 crore is more than 90 days past invoice and Rs 30 crore is the amount by which one large customer exceeds the 20% concentration limit. Eligible receivables are advanced at 85%.
Inventory is Rs 300 crore: raw material Rs 100 crore advanced at 60%, work in progress Rs 50 crore at 0%, and finished goods Rs 150 crore at 65%, rates set from an appraisal of what each would fetch in an orderly liquidation.
2Your task
Compute the borrowing base, say what Samvera can draw, and explain why each category is treated as it is.
Quick check
Roughly what is the borrowing base before comparing it with the line?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The borrowing base is about Rs 421 crore, so Samvera can draw the full Rs 350 crore line, with about Rs 71 crore of collateral cushion above it. Eligible receivables of Rs 310 crore at 85% give Rs 263.5 crore; raw material, work in progress and finished goods give Rs 60 crore, nothing and Rs 97.5 crore. Of Rs 700 crore of assets, only Rs 421 crore lends.
Step 1What does an asset-based lender actually lend against?
A pawnbroker does not lend the price of a gold chain; he lends a share of what he could sell it for tomorrow, and he refuses items he cannot sell at all. An asset-based loan lends a percentage of what each asset would fetch in a liquidation, after first removing assets that cannot be relied on. The result is the borrowing baseThe amount a borrower may draw under an asset-based line, recalculated regularly from eligible receivables and inventory times their advance rates., and availability is the smaller of the base and the line.
Step 2How does the base build up?
Receivables first. Remove the Rs 60 crore over 90 days and the Rs 30 crore concentration excess; Rs 310 crore is eligible, and at 85% it lends Rs 263.5 crore. Inventory next: raw material Rs 100 crore at 60% is Rs 60 crore, work in progress contributes nothing, and finished goods Rs 150 crore at 65% is Rs 97.5 crore. The base is Rs 421.0 crore. Because that exceeds the Rs 350 crore line, the full line is available and Rs 71 crore of collateral sits unused as a cushion.
| Category | Gross | Eligible | Advance | Lends | The nuance |
|---|---|---|---|---|---|
| Receivables | 400.0 | 310.0 | 85% | 263.5 | Ageing, concentration, credit notes that dilute collections |
| Raw material | 100.0 | 100.0 | 60% | 60.0 | Sellable to others, but at a discount |
| Work in progress | 50.0 | 50.0 | 0% | 0.0 | Half-made kits have almost no buyer |
| Finished goods | 150.0 | 150.0 | 65% | 97.5 | Obsolescence and slow movers |
| Total | 700.0 | 610.0 | 421.0 |
Step 3Why is each category treated differently?
Receivables are the best collateral because they turn into cash on their own, but only if the customer pays: old invoices signal disputes, a concentrated customer makes the pool one credit, and credit notes for returns quietly reduce what is collected. Inventory lends less because it must be sold to become cash, and the lender sells into a distressed market. Raw material has other buyers; finished goods can be obsolete; work in progress has almost none, which is why its rate is zero. Appraisals, field exams and reserves for items such as rent owed to warehouse landlords keep the base honest between reports.
The view: Samvera can draw Rs 350 crore today with a healthy cushion, but that cushion moves every month. If the large customer's excess grows, or ageing worsens after a slow quarter, the base can fall under the line quickly. Ask for weekly reporting when availability runs thin, and a springing covenant that applies only when excess availability falls below an agreed floor.
Where candidates lose it
The usual slip is applying advance rates to gross figures: 85% of Rs 400 crore of receivables gives Rs 340 crore, lending against invoices that are old or overconcentrated and inflating the base by more than Rs 75 crore.
The second is quoting the base as what is available. Availability is the smaller of the base and the line, less anything already drawn; here the line, not the collateral, binds.
What the interviewer asks next
- The large customer's balance doubles next month. What happens to the base?
- What is dilution, and how would you reserve for it?
- Why might a lender still lend against work in progress in some industries?
- What is a springing fixed charge covenant, and when does it bite?
Asked at Truist Securities, Asset Finance, Atlanta, 2023 (Wall Street Oasis): What are the primary categories of collateral securing an ABL and what are the nuances for each?
Company names and figures are illustrative.