Client Profile
A steel processing and distribution company operating through three legal entities. The borrower was seeking a $225 million credit facility secured in part by inventory collateral, including in-transit goods.
Engagement Overview
Our firm was engaged to perform a comprehensive collateral field exam to assess inventory eligibility, shipping terms, and exposure to commodity price volatility. The company operates in a dynamic sector where steel pricing and inventory valuation fluctuate rapidly, requiring tailored analysis and lender protections.
Scope of Work
Our review focused on inventory collateral management, reporting sophistication, and commercial risk related to pricing volatility and rebate programs. Key scope items included:
- Inventory Classification & In-Transit Review: The borrower maintained three distinct inventory classes, including raw materials, work-in-process, and finished goods—with a significant portion of inventory in transit. We reviewed the treatment of in-transit items for ownership and eligibility within the borrowing base.
- Commodity Price Volatility: Given steel’s inherent price volatility, we assessed the company’s valuation methodology and how changes in market conditions impacted reported inventory values. We ensured alignment between operational reporting and accounting practices.
- Systems & Reporting Assessment: The borrower utilized a combination of sophisticated ERP and custom reporting tools to track inventory movement, valuation, and costing. We evaluated the integrity of these systems and ensured the data could be relied upon for lender reporting purposes.
- FOB Shipping Terms & Reserve Development: Our team identified that a meaningful portion of inventory shipments were structured under FOB destination terms, which posed collateral timing and ownership concerns. The lender was previously unaware of this shipping arrangement. We recommended and implemented a 10% reserve on FOB destination goods to mitigate this risk.
- Rebate Program Review: We conducted a detailed review of historical rebate activity on both the customer and vendor side, which had a material impact on net sales and margin reporting. This review helped the lender better understand receivable offsets and their effect on borrowing base availability.
Outcome & Impact
Our diligence resulted in key adjustments to the lender’s approach to inventory eligibility and reserve requirements. Specific impacts included:
- Implementation of an FOB destination reserve to address timing of title transfer
- Greater transparency into inventory valuation methodologies amid a volatile commodity market
- Clear documentation of rebate programs and their financial impact on receivables
Value Delivered
- Identification of collateral risks tied to inventory ownership and shipping terms
- Enhanced lender confidence in reported inventory balances and rebate offsets
- Improved borrowing base controls aligned with market volatility and complex operations
