Client Profile
A large-scale wholesale electronics distributor with global operations and a parent-subsidiary structure. The company was seeking a $1.5 billion loan facility to support ongoing operations and strategic growth initiatives.
Engagement Overview
Our firm was engaged by the prospective lender to perform a comprehensive collateral field exam focused on accounts receivable integrity and inventory risk. The scope of work was expanded due to the borrower’s operational complexity, reliance on rapid inventory turnover, and the sale of intangible products.
Scope of Work
The engagement focused on identifying key risks impacting the borrowing base and providing transparency into operational practices, including:
- Accounts Receivable & Proof of Service: We conducted targeted invoice testing, with particular attention to the sale of intangible products such as software licenses and digital solutions. Our team assessed the company’s ability to provide sufficient proof of delivery and service completion, which was essential to validate revenue and eligible A/R.
- Inventory Assessment – In-Transit Goods: We reviewed both inbound and outbound in-transit inventory to assess ownership, shipping terms, and timing of transfer of control. This ensured proper inclusion or exclusion of in-transit items within the borrowing base.
- Floor Plan Arrangements: The company had several material floor plan financing arrangements in place with other lenders. We evaluated the structure and terms of these arrangements and analyzed their impact on inventory ownership and availability as collateral.
- Technology Inventory Risk & Turnover: The borrower’s business model relies on rapid inventory turnover to distribute fast-moving electronic goods. We assessed the internal controls and processes in place to mitigate obsolescence risk, which is heightened in the tech distribution space due to frequent product refresh cycles.
Outcome & Impact
Our analysis provided the lender with a comprehensive view of both receivables integrity and inventory dynamics. Key takeaways included:
- Identification of specific A/R categories that required additional reserves due to insufficient proof of service
- Clarification of inventory treatment and ownership rights within the floor plan structure
- Validation of the borrower’s operational processes that reduce aging and obsolescence risks associated with high-turn electronic products
Value Delivered
- Improved lender understanding of non-traditional A/R and intangible sales risk
- Accurate borrowing base calculation through proper classification of in-transit inventory
- Assessment of collateral risk in a dynamic and rapidly evolving industry
- Increased confidence in underwriting the $1.5B facility with tailored reserves and controls
