Early one morning in a conference room, an asset-based magister was conversing with his prized young pupil about some of the curious phenomena prevalent in the asset-based credit markets. The pupil, let us call him Liborus, first inquired about a certain passage he often noticed while analyzing loan documentation.
Liborus: Magister, why do loan documents include a clause whereby the borrower has to compensate the lender for any change in law that impacts the lender’s taxes or capital requirements? Should not the lender bear its own business risk? Is it fair and just that these risks are passed on to the borrower?
Asset-based Magister: It, among other gratuitous minutia, allow for the printing of credit agreements and ancillary documents that are usually several hundred pages long. At the end of each deal, these documents are beautifully bound by artisans that distribute final copies to all of the professionals that toiled on the deal team.
Still looking perplexed, Liborus moved to his next query regarding the reliability of real estate appraisals.
Liborus: I do not understand how an asset-based lender can advance against the appraised value of an industrial property. Are these properties not usually located in the middle of sparsely populated and economically depressed regions of the country? Is the land not often tainted from the venomous by-products of manufacturing processes? Is there no secondary use? In the event that the plant ceases operations, are not the chances of selling the real estate for any value, let alone that which is in the appraisal, virtually nil?
Magister: While that may be true, young Liborus, it allows for the production of thick appraisal documents for the loan file. Remember that these appraisals have multi-colored maps, subject photographs and elevations that consume much paper and ink. Most importantly, each page contains the logo of the brand name appraiser. Lenders are enamored with documents in their loan files that contain the logos of brand name firms. In fact, every five harvests or so, asset-based lenders actually resolve that it be prudent to deem brands and logos lendable collateral just as they periodically decide to lend on air or cashflow, even though they are asset-based lenders and logos, air and cashflow are not, ya know, assets. Such harvests ultimately end in famine come bonus time.
Brow furrowed, Liborus was becoming increasingly frustrated. He could not see the connection between his questions and the answers provided by his otherwise beloved magister. Nevertheless, he moved on to the next matter.
Liborus: Why is every advance rate in a term sheet preceded by the words up to, such as an advance on accounts receivable of up to 85%. Is not such as caveat cowardly? Should not the lender simply convey his true intent unambiguously? Moreover, why do loan documents include clauses that allow the lender to implement any kind of reserve at their sole discretion at any time? Do not these provisos render meaningless all other terms in the document relating to availability?
Magister: We must not judge, young pupil, for all of us in the finance community have such streaks of pusillanimity. Did you ever study an investment banker’s offering memorandum or valuation report? There are more qualifiers and disclosures in there than actual work product. However, it is such clauses in term sheets and loan documents that enable endless negotiation between borrower and lender as well as the printing and discarding of many futile drafts.
Poor Liborus could not fathom the meaning of the magister’s responses. He posed one last question, hoping to unearth the lingua sacra underlying the philosophy of his great and noble mentor.
Liborus: Why are there several marketing brochures and hand-outs from lenders and service providers included in the burlap bags given away to each registrant at lending conferences? Are these brochures not immediately discarded with nary a perusal so that the attendee can seek the more bountiful treasures buried beneath, such as mints and stress balls?
The magister ceased responding. Liborus and the gentle magister sat in silence for many minutes. The sun peaked out over the mountain in the distance. A bird chirped. Minstrels played off in the distance (or perhaps it was a smartphone ring tone). Liborus sensed and was soon overcome by the pure serenity expressed by the magister. The conference room filled with an ethereal glow. This radiance penetrated Liborus’s very being and with it finally came an understanding of the great mystery of asset-based lending:
It is all of this superfluous printing that helps sustain the commercial printing industry as well as capital equipment manufacturers and it is these types of companies that borrow from the asset-based credit market.
No printing, no asset-based loans. No asset-based loans, the tombstones in The Wall Street Journal would be replaced with the tombstones of once modestly thriving (or at least surviving) businesses. The streets would become littered with litter (doesn’t anyone edit these things?) and hopeless "For Sale" signs would sprout from the muddied lots fronting decaying industrial buildings. Tumbleweeds would roll across sullied linoleum past the ancient microwave in the old company cafeterias. OSHA posters on dirty walls would fade then curl then crumble to the floor then blow away as dust.
Liborus felt a deep connection and spiritual unity with asset-based lending and all things.