AR and Inventory Collateral Due Diligence of an Existing ABL Borrower
Our Client, a middle market bank, had an existing asset based loan to an apparel wholesale distributor. The borrower’s Controller retired and the new Controller noticed a million dollar error when trying to replicate the previous Controller’s last monthly collateral report. After the borrower restated its monthly collateral report, which caused the borrower’s availability to drop below the loan’s outstanding balance, Riveron was requested to perform procedures on the borrower’s AR and inventory. The bank was concerned with the borrower’s inventory system, and Riveron was requested to perform additional procedures related to the inventory test count.
Riveron recalculated the current month’s borrowing base and compared it to the borrower’s borrowing base, noting several differences.
The additional ineligibles identified primarily related to:
- Past due receivables – the borrower was incorrectly calculating the days past invoice
- Gross inventory listing – the borrower generated the initial inventory perpetual before month end closing
- Wage lien – the borrower was not including a wage lien, which is required based on Wisconsin law
- Dilution reserve – AR credits were greater than the bank’s threshold, borrower incorrectly calculated
- Accrued commissions – the borrower was not including accrued commissions due to third parties
Benefit to our Client
While there were differences noted between Riveron’s procedures and the borrower’s monthly borrowing base calculation, Riveron was able to provide comfort to the bank that there were no major system issues related to the inventory reporting. Riveron trained the borrower’s new Controller on procedures to calculate the borrowing base correctly going forward, and the bank was able to maintain the relationship and loan with the borrower.