Borrowing Base Facilities
The relative complexity necessitates a good understanding of the underling business. Investing our time early into the deal will result in both sides being comfortable with critical elements such as: control over security requirements, cash sweeps and releases, o/c ratios, borrowing base audits and many others
A borrowing base facility is a type of asset-based loan financing. The key is in the name: the amount of the facility depends on the ‘borrowing base’, which here is just another term for ‘collateral’.
A borrowing base facility is a type of asset-based loan financing. The key is in the name: the amount of the facility depends on the ‘borrowing base’, which here is just another term for ‘collateral’.
Borrowing base facilities are frequently used by commodities trading houses or producers. There are similarities between self-liquidating trade finance facilities and borrowing bases. Both are similar in scope of security taken by the lenders: some sort of inventory, documents of title, receivables and bank accounts. Both self-liquidating facilities and borrowing bases often contemplate not only loans, but also issuance of payment instruments, such as documentary letters of credit or demand guarantees.
Unlike bilateral bank finance, borrowing base facilities are usually club deals or are syndicated and are committed on the part of the lenders. A borrowing base facility is also typically made available to several companies in the borrower’s group.
Borrowing bases are tailored to the type of inventory and typically have more sophisticated security packages. For example, a borrowing base may include security governed by local law and taken over goods located in a specific overseas warehouse. Such a security arrangement would be uncommon for a bilateral self-liquidating facility, which typically includes only a generic English law pledge to cover documents of title.
Documentation for borrowing base facilities can be complex and the parties should allow sufficient time for all constituent parts to be completed.
For example, many weeks may pass before security in certain jurisdictions take effect / is perfected. If those ‘difficult’ assets are not critical, the facility might be prepared so it takes effect in stages.
As we noted above, the amount available to draw under a borrowing base facility is determined by reference to the aggregate value of eligible assets of the borrower subject to specified advance ratios (or ‘haircuts’). The facility will spell out detailed requirements to eligible assets: for example, a facility may give credit only to receivables from investment grade counterparties with a maturity not exceeding 180 days.
The aggregate value of the eligible assets, subject to haircuts, will be the borrowing base.
Borrowing base facilities typically require a periodic audit of the borrowing base, that is an exercise, where the borrower’s submission on the state of the borrowing base are verified (often at the relevant sites). An audit can be distracting on borrower’s personnel and so is often resisted. Several well-known consultancy firms offer services in the area and can routinely provide audit reports to the syndicate on the condition of a borrowing base.
Finally, we should note that the Loan Market released its recommended form of a borrowing base facility in 2021. However, the template should be seen as no more than a starting point. The workings of a borrowing base will be highly dependent on the commercial background.
