Client Profile
A publicly traded communications and electronics distributor with global operations. The borrower operates through a parent company and numerous subsidiaries, with multiple reporting and operating divisions under each entity. The company was seeking a $600 million credit facility from a new lender.
Engagement Overview
Our firm was engaged to conduct a comprehensive collateral field exam to support the proposed lending arrangement. The complexity of the borrower’s legal and operational structure, along with significant intercompany and treasury activity, posed heightened risk to the lender.
Scope of Work
Our diligence team conducted an in-depth analysis across multiple areas, including:
- Borrowing Base Reserves: We identified and quantified key borrowing base reserves, including dilution reserves and sales tax exposures that materially impacted collateral value.
- Accounts Receivable & Revenue Verification: We performed a detailed A/R and cash proof across all operating entities and over 50 bank accounts. This effort included reconciliation of payments, validation of revenue recognition practices, and confirmation of customer collections to assess true cash generation.
- Treasury Structure Review: We evaluated the company’s complex treasury structure, uncovering numerous non-lender operating and depository accounts that were not disclosed initially and lacked Borrower Account Control Agreements (BACAs).
- Intercompany Transactions: Our team analyzed significant intercompany transactions involving purchases, sales, and centralized treasury functions. We provided clarity around intercompany flows and ensured proper elimination entries were made to avoid collateral overstatement.
- Rebate Program Analysis: Given the borrower’s historical reliance on rebate income, we conducted a detailed review of customer and vendor rebate programs to determine timing, accuracy, and recognition practices that could impact revenue sustainability and working capital.
Outcome & Impact
Our findings gave the prospective lender a clear and actionable view of collateral quality, cash control, and structural risks. As a result:
- The lender was able to adjust the borrowing base structure and terms of the credit facility.
- New BACAs were implemented for previously undisclosed bank accounts.
- Treasury structures were reconfigured to ensure compliance and transparency post-separation.
- Rebate accounting practices were revised and incorporated into covenant monitoring processes.
Value Delivered
- Identification of previously unknown risks impacting over $100MM in borrowing base value
- Enhanced transparency of cash and revenue flows across 50+ bank accounts
- Strengthened lender control through corrective treasury restructuring
- Increased lender confidence in collateral and borrower operations
