Marshall Glade and Paul Dopp, from GlassRatner's Atlanta office, have been published in the November 2017 issue of The Secured Lender. Their article 'Anatomy of a Fraud' provides detailed analyses referencing an ABL example on how missed or ignored red flags can lead to substantial losses for lenders. The Secured Lender is a monthly magazine that is dedicated exclusively to the asset-based financial services and factoring industries. Continue reading below for an excerpt from the article.
All banks/lenders have policies, procedures and processes to monitor their credits. The overall purpose of loan monitoring is to identify, as soon as possible, any changes in the borrower’s financial condition or performance that may impact the borrower’s capacity to repay the outstanding loan as agreed. A lender’s credit file should contain evidence demonstrating the monitoring activity by the credit officer or analyst including site visits, phone calls, interim financial reporting and annual audited or reviewed financial statements; however, these policies and procedures are only as good as the credit officers and field auditors who apply them.
For purposes of this article, I am referencing an asset-based loan ("ABL") example which is, generally, any kind of borrowing secured by an asset of the company. To monitor an ABL, the lender typically relies on a borrowing base certificate ("BBC") submitted by the borrower on a periodic basis, to evaluate the borrower’s financing needs, cash conversion cycle and quality of the collateral. The borrowing base is the collateral base which specifies the amount that can be borrowed in terms of collateral type, eligibility and advance rates.1
The Office of the Comptroller of the Currency ("OCC") regulates and supervises all national banks and provides guidance on asset-based lending through the Comptroller’s Handbook. The OCC’s ABL guidance recommends specific monitoring actions to minimize credit, operational, compliance, strategic and reputational risks. Typically, an analyst or credit officer reviews the BBC data that details the change in the collateral base in the reporting period (payments/credits applied to reduce AR and new billings that increase AR) and the AR aging. The aging of AR is important because banks generally only lend against "eligible" AR, typically defined as AR that is less than 90 days outstanding. Bank loan monitoring policies also require a field audit where a site visit is performed to confirm the existence and value of the collateral on some periodic basis.
Read the entire article here.