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How to Finance a Gap ('Airball') in an Asset Based Loan
1. How to Finance a Gap (‘Airball’)
in an Asset Based Loan
SC Credit Advisors
Recapitalization Advisory For the Middle Market
A Stone Carlie Company
www.sccreditadvisors.com
2. Table of Contents
• Challenge: Financing a Gap 3
• Objectives & Considerations 4
• Solutions 5
• Example of Financing a Gap 6
• About SC Credit Advisors 8
• Contact Information 10
www.sccreditadvisors.com 2
3. Challenge: Financing a Gap
A financing gap (‘Airball’) in an asset based loan (ABL) occurs when the required
funding amount, or existing loan amount, exceeds the value of collateral* (or
borrowing base) acceptable to a lender. For example:
A Gap
… But the Results -
ABL lender How Does
Borrower will only the Borrower
needs this fund a Fund the
amount of portion of Gap?
capital to the current
fund, for need, based
example, a on collateral
spike in acceptable
sales… to the
lender
Required Funds $ Amount Funding Breakdown $ Amount
* Collateral for a lender is typically: Accounts Receivable (A/R), Inventory, Real Estate and Equipment. Borrowing
Base equals collateral adjusted for advance rates (e.g., lending 80% of A/R) and reduced by any reserves.
www.sccreditadvisors.com 3
4. Objectives & Considerations
• Business seasonality • Rapid inventory buildup
Filling a Funding • Large orders • Stretched cash conversion cycle
Gap Caused By: • Slow inventory turns
Obtain Funds • Disruptions in operations • Turning down sales
Quickly to • A cash shortage
Avoid:
Reasonable • Funding size • Collateral
Borrowing Cost • Borrower credit • Cash flow
Based On:
• Adequate maturity • Recapitalization plan in place if
Appropriate • Appropriate covenants funding is short term
Structure: • Reasonable intercreditor
agreements, if applicable
www.sccreditadvisors.com 4
5. Solutions
Financing Options for an ABL Financing Gap
Factoring or Second Cash
Purchase Order Lien Mezzanine Flow Participation Unitranche
Financing(1) Loan(2) Financing Loan (‘B’) Loan Facility
1) Leverage
borrower’s
collateral(3)
2) Leverage
borrower’s cash
flow(4)
3) Recapitalize all or
most of the
capital structure(5)
(1) Primarily used by companies with lower amounts of EBITDA
(2) Institutional or high net worth investors
(3) Leverage borrower’s collateral with a lender that views collateral as more valuable, or leverageable,
than the existing ABL lender
(4) Leverage borrower's cash flow: utilize a lender that will lend against existing cash flow as a
supplement to the existing ABL
(5) Recapitalize all or most of the capital structure: optimize collateral and cash flow
5
6. Example of Financing a Gap with a 2nd Lien Loan
Challenge
• Company has a senior asset-based revolving line of credit with a $30 million
limit (secured by accounts receivable and inventory); existing lender won’t
increase limit
• Immediate working capital need of $40 million to purchase inventory for a
large order with abnormally long customer payment terms; additional short-
term capital need of $10 million
Considerations
• Borrower’s existing lender has conservative advance rates and limits on
certain collateral leaving excess collateral value beyond the existing lender’s
borrowing base
• Borrower has sufficient EBITDA to service and repay additional indebtedness
once the upcoming order is filled
www.sccreditadvisors.com 6
7. Example of Financing a Gap with a 2nd Lien Loan
Solution
• Borrower utilizes short term, 2nd lien loan provided by a debt fund* to
purchase inventory
• Loan is repaid upon payment by customer
2nd Lien Loan
Provided by
Debt fund Debt Fund
Financing additional
$10 mm Gap $10 mm Borrowing $10 mm
Base
$40 mm Current
Borrowing
Base for Existing
Max ABL $30 mm Senior ABL
$30 mm ABL $30 mm
Funding
Lender
Required Funding Existing Line of Credit Borrowing Base Funding Breakdown
* Debt fund has more aggressive collateral valuation and/or advance rates.
www.sccreditadvisors.com 7
8. SC Credit Advisors: Summary
• SC Credit Advisors, LLC (SCCA) assists private middle market companies with
structuring and raising capital through securities registered individuals*. We also
provide credit-related advisory services to companies, lenders, financial sponsors
and high-net-worth investors.
• Our goal is to develop and implement creative and practical financing solutions for
our clients, allowing them to focus on running their businesses.
Typical Client Profile for Capital Raising
Ownership Private
Revenue $10 million to $300 million
Capital Needs $5 million to $50 million
Existing Capital Moderately to highly leveraged
Structure
Industries All industries, except development stage companies
*Securities transactions conducted through StillPoint Capital, LLC Member FINRA/SIPC
www.sccreditadvisors.com 8
9. SC Credit Advisors: Services
Corporate and Financial Sponsor
• Assisting middle market companies and their shareholders in raising debt and
equity capital (structuring, sourcing, negotiating, funding)*
• Managing stressed lender and investor relationships, including facilitating the
negotiation of loan modifications with existing lender(s), forbearance agreements,
waivers, loan amendments and debt to equity swaps
• Providing operational assistance and/or leadership in turnaround situations, as
needed
Lender
• Providing borrowers with capital alternatives which complement and support
a lender’s position
• Assisting the lender in exiting loans to troubled or distressed borrowers through
a refinancing or full recapitalization
• Providing operational assistance or functioning as the turnaround manager in
distressed situations to help borrowers improve operating practices and reduce
lender risk
High Net Worth Investor
• Sourcing, structuring and/or evaluating complex debt and equity private
placements*
• Evaluating existing investments for proper structure, risk, return and control
parameters
*Securities transactions conducted through StillPoint Capital, LLC Member FINRA/SIPC
www.sccreditadvisors.com 9
10. Contact Information
Headquarters
101 South Hanley Road
Suite 800
St. Louis MO 63105
GREG PORTO GREG TOBBEN
Office: 314.889.1197 Office: 314.889.1196
Mobile: 312.339.2857 Mobile: 314.458.8186
Email: gporto@sccreditadvisors.com Email: gtobben@sccreditadvisors.com
A Stone Carlie Company
Securities transactions conducted through StillPoint Capital, LLC Member FINRA/SIPC,
located at 13051 W. Linebaugh Ave., Suite 101 Tampa, FL 33626
www.sccreditadvisors.com 10