18/04/2019 Andrew

Stockpiling & Impact on ABL

Introduction

Recently, the Office for National Statistics (ONS) pointed towards a survey completed by IHS Markit/CIPS that confirmed companies across the UK are stockpiling goods in anticipation of the disruption that could occur should the UK’s depart the European Union without a withdrawal agreement. Companies such as Unilever have already announced plans to import extra supplies in order to mitigate any potential disruptions due to a no deal Brexit.

Recent Data

It has been reported, recently, that stockpiling has led to a rise in imports by 5.3% in the three months to February. Moreover, data also suggests that the UK’s sluggish economic growth has been buoyed by Brexit stockpiling, which has been confirmed by recent figures from the ONS showing that U.K. economy grew in February, by 0.2 percent from January, as manufacturers churned out goods for clients stockpiling ahead of Brexit, and as Brexit uncertainty continues there is real a possibility that this practice may continue.

There is evidence to suggest that stockpiling is potentially disadvantageous both for companies and for the economy. Capital Economics, the independent economic research company, says that’s stockpiling only provides a temporary boost to economic activity and there is little evidence of it significantly supporting overall economic growth.

In addition, over production, the costs of long-term storage and the need for more storage space will have a ripple effect on companies impacting their costs and therefore cash flow, competitiveness and pricing.

Stockpiling & Asset Based Lending (ABL)

With regard ABL a strategy of stockpiling could have a potentially negative impact on facilities as the borrower’s cash is tied up in buying inventory which may take longer to sell. Also, the borrower may have to give higher discounts to sell the inventory which will impact profitability.

Potential Impact on ABL from a Borrower’s Perspective

  • Not all goods stockpiled will necessarily be included in the borrowing base as this will depend on what the Borrower has agreed with the Lender.
  • The Borrower will have to ensure the increased pool of assets will need to be properly secured in favor of the Lender.
  • Stockpiling may adversely affect a borrower’s cash conversion cycle and therefore the borrower’s ability to leverage the value of the collateral.
  • Where assets are heavily discounted or depreciate this will have an impact on the level of value the borrower can extract from the collateral.

Potential Impact on ABL from a Lender’s Perspective

  • Stockpiling may lead to collateral being included in the borrowing base that cannot be sold or can only be sold at a heavy discount.
  • Lender will need to monitor their borrowers’ management information closely to identify unusual “spikes” in buying patterns.
  • If stockpiling is an agreed strategy, then the Lender will have to ensure their Borrower has required cash reserves to purchase increased inventory but also a plan on how to sell/manufacture inventory promptly.
  • Stockpiling might also lead to an increased amount being deducted from the borrowing base which may impact availability.

Conclusion

European Valuations’ view is that stockpiling increases overall exposure of the lender dramatically in an uncapped facility. In addition, a large increase in inventory without a commensurate increase in sales results in either higher discounts to sell in the same time period of 90 days or less – or it increases costs of extending the sale process beyond the normal 90 day period. Either way, if the lender doesn’t refresh/review the NOLV and exit strategy they could be well overexposed.

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