A Borrowing Base is an essential part of most asset financing facilities. It is a tool used to calculate the amount of money that a lender will allow a Borrower to draw on a credit facility based on the value of the collateral the company has pledged. A borrowing base could be applied to a single piece of collateral, but more often it is used when borrowing against a non-static portfolio of assets.
Let’s revisit the concept of Loan To Value (LTV). Typically, each asset added to a facility will be given an individual LTV. The LTV could be a predetermined static value, based on specific asset level criteria or completely up to the lender’s discretion. Below is a diagram depicting a facility with a 75% LTV and with remaining capacity for additional collateral to be added. The borrower owns assets worth the total value of all assets, but has only used the Equity value below to purchase them, the remaining cost of the assets was paid for using the borrowed amount.
Concentration limits are predetermined maximum or minimums applied to the pool. Lenders negotiate these limits to give the borrower some flexibility in what assets that are able to contribute to the facility, but not unlimited flexibility to add anything they would like. A lender will use these to ensure that when they are pricing and sizing a facility, they have a sense of the general makeup of collateral that will be contributed to the facility.
Concentration limits can be set on a wide variety of factors and are specific to the underlying assets, such as:
Borrowing base certificate is a document a borrower submits to a lender that shows all the relevant changes to collateral and recalculates the availability in the borrowing base. Borrowing bases are living and breathing calculations that will change as collateral moves up and down in terms of value, matures or defaults. This document is incredibly important to both parties involved in the transaction because it reflects the amount of borrowing base availability or deficit. If there is availability then the borrower can draw down on the loan amount and if there is a deficit then the borrower will have to inject cash, replace existing assets with higher value assets or pay down the loan amount.
