Appropriate For Companies Selling Consumer Products To Retailers …Apparel

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Appropriate For Companies Selling Consumer Products To Retailers …Apparel

  1. 1. STAGES of FINANCING SENIOR DEBT Randy Goeken Senior Vice President
  2. 2. SENIOR DEBT <ul><li>BANKS </li></ul><ul><ul><li>Asset based lending </li></ul></ul><ul><ul><li>Balance sheet lending </li></ul></ul><ul><ul><li>Cash flow lending </li></ul></ul><ul><li>COMMERCIAL FINANCE COMPANIES </li></ul><ul><ul><li>Cash flow lending </li></ul></ul><ul><ul><li>Asset based lending </li></ul></ul><ul><ul><li>Factoring </li></ul></ul><ul><li>HEDGE FUNDS </li></ul><ul><ul><li>?? </li></ul></ul><ul><ul><li>(2) </li></ul></ul>
  3. 3. Cash Flow Lending <ul><li>Primarily for mature companies </li></ul><ul><ul><li>Strong balance sheet </li></ul></ul><ul><ul><li>History of strong cash flow </li></ul></ul><ul><ul><li>Enterprise value/name recognition </li></ul></ul><ul><ul><li>Annual revenues $100MM+ </li></ul></ul><ul><ul><li>Strong financial leverage </li></ul></ul><ul><ul><li>(low total debt : EBITDA ratio) </li></ul></ul><ul><ul><li>Strong, deep management team </li></ul></ul><ul><ul><li>Non-cyclical industries </li></ul></ul><ul><li>Larger loan requirements…$25MM+ </li></ul><ul><li>Loans are multiple of free cash flow </li></ul><ul><li>(3) </li></ul>
  4. 4. Asset Based Lending <ul><li>Revolving lines of credit based upon specific advance rates on accounts receivable & inventory </li></ul><ul><ul><li>Up to 85% on receivables </li></ul></ul><ul><ul><li>Up to 50% on inventory </li></ul></ul><ul><li>Term loans/leases secured by equipment </li></ul><ul><ul><li>Up to 80% of “hard” costs on new equipment </li></ul></ul><ul><ul><li>Up to 80% of appraised Orderly Liquidation Value on existing equipment in use </li></ul></ul><ul><ul><li>Based on % of appraised value </li></ul></ul><ul><li>Real estate term loans </li></ul><ul><ul><li>Up to 75% of fair market value </li></ul></ul><ul><li>Pricing </li></ul><ul><ul><li>Prime + 0.50 and up </li></ul></ul><ul><ul><li>Closing Fee of 0.50-2.00% </li></ul></ul><ul><ul><li>Collection days all-in from 10-25% </li></ul></ul><ul><ul><li>Collateral management fees </li></ul></ul><ul><ul><li>(4) </li></ul></ul>
  5. 5. <ul><li>Expect: </li></ul><ul><ul><ul><li>Quick response </li></ul></ul></ul><ul><ul><ul><li>Flexibility </li></ul></ul></ul><ul><ul><ul><li>Higher pricing than banks </li></ul></ul></ul><ul><ul><ul><li>Fewer and less strict covenants than banks </li></ul></ul></ul><ul><ul><ul><li>More detailed reporting requirements </li></ul></ul></ul><ul><ul><ul><li>Lock box on collections </li></ul></ul></ul><ul><ul><ul><li>Personal guarantees from principals </li></ul></ul></ul><ul><ul><ul><li>Supportive of rapid growth </li></ul></ul></ul><ul><ul><ul><li>Pledge of all assets of the company </li></ul></ul></ul><ul><ul><ul><li>(5) </li></ul></ul></ul>
  6. 6. Factoring <ul><li>Revolving lines of credit based upon specific advance rates on accounts receivable & inventory </li></ul><ul><ul><li>Up to 85% on receivables </li></ul></ul><ul><ul><li>Up to 50% on inventory </li></ul></ul><ul><ul><li>Invoice by invoice </li></ul></ul><ul><ul><li>Full notification… </li></ul></ul><ul><ul><li>Borrowers’ customers remit payment directly to Factor </li></ul></ul><ul><ul><li>Usually non-recourse… </li></ul></ul><ul><ul><li>Factor takes “financial” risk & arguably owns the receivable it factors </li></ul></ul><ul><ul><li>Outsourcing credit & collection departments to Factor…variable cost, better credit information, higher collection rates…benefit from the vast volume and experience of the factoring team </li></ul></ul><ul><li>Appropriate for companies selling consumer products to retailers …apparel, jewelry, electronics, etc. </li></ul><ul><li>Pricing: Loans: Prime + 1-5% </li></ul><ul><li> Factoring commission: 50-100 bps </li></ul><ul><li>(6) </li></ul>
  7. 7. <ul><li>Asset Based example: </li></ul><ul><ul><li>Manufacturer of asphalt roofing paper </li></ul></ul><ul><ul><li>Non-recurring losses due to the breakdown of certain equipment, necessitating the outsourcing of that operation </li></ul></ul><ul><ul><li>for several months </li></ul></ul><ul><ul><li>Temporary margin declines resulting in loss on P&L </li></ul></ul><ul><ul><li>Followed by unusually heavy and lengthy rainy season resulting in a longer than expected delay in the return </li></ul></ul><ul><ul><li>to profitability </li></ul></ul><ul><ul><li>Bank not happy with loss, asks Borrower to find alternate financing </li></ul></ul><ul><ul><li>Commercial finance company refinances the bank </li></ul></ul><ul><ul><ul><li>Provides more working capital via higher advance rates </li></ul></ul></ul><ul><ul><ul><li>on both receivables and inventory </li></ul></ul></ul><ul><ul><ul><li>Fewer and less strict financial covenants </li></ul></ul></ul><ul><ul><ul><li>12 month contract, allowing the company to go back to bank after return to profitability </li></ul></ul></ul><ul><ul><ul><li>Slight increase in loan cost, although bank would probably institute default rates if the company did not refinance </li></ul></ul></ul><ul><ul><ul><li>(7) </li></ul></ul></ul>
  8. 8. <ul><li>Factoring example: </li></ul><ul><ul><li>Manufacturer of girls’ junior clothing </li></ul></ul><ul><ul><li>Near start up…$1,500M sales and an operating loss in first year with Factor </li></ul></ul><ul><ul><li>Substantial growth…to mid 8 figures sales and nice profit in year two to low 9 figures sales and substantial profit in year three </li></ul></ul><ul><ul><li>Strong balance, strong earnings, excellent management </li></ul></ul><ul><ul><li>Why factor instead of bank? </li></ul></ul><ul><ul><ul><li>Expecting continued growth…banks get uncomfortable </li></ul></ul></ul><ul><ul><ul><li>Hundreds of customers…would be credit & collections nightmare for the Borrower </li></ul></ul></ul><ul><ul><ul><li>(8) </li></ul></ul></ul>

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