Senior debt relationship with asset collateralized loans

December 28, 2019

by a searcher from Carnegie Mellon University - Tepper School of Business in Boston, MA, USA

Looking for insight from the brain trust as I didn't get there with 15 minutes of Googling!

Thinking through an industry that has lots of equipment as capital (e.g. vehicles) and any forecasted growth will require substantial capex in that form.

If a searcher buys a business like this with Senior Debt, are you still able to finance future vehicle purchases? Typically a bank loan would use the vehicles as collateral and issue a loan, but say you have an SBA asset based loan after the transaction, I assume they would look at all assets as collateral. Is it the case that FUTURE assets acquired could be financed separate from that collateralization?

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Reply by a lender
from University of Missouri in St. Louis, MO, USA

Specifically regarding vehicles the bank would have a difficult time claiming collateral you acquired post closed. Vehicles would have titles and it would be spelled out on the title who the primary lien holder is. There are also specific UCC lien filings that can be filed on individual pieces of equipment post close that would also be tough for the original/Senior lender to have claim to. At a minimum they would be Junior to the lender who financed equipment or vehicles post- close. One thought though is that any lender who lends in capital intensive industries would (prudently should) have some level of CAPEX monitoring. This would either be part of the cash flow analysis or something as explicit as a covenant from the bank to incur indebtedness over a certain amount.. However, outside of getting your original loan out of compliance, actually getting financing on equipment post acquisition shouldn't be an issue feel free to reach out at redacted

Reply by a searcher
from University of Pennsylvania in Las Vegas, NV, USA

I have experience raising asset based loans collateralized by AR (company is an AR factoring company that purchases AR at a discount and collects at face value). The loan had a total commitment amount, but the drawable amount was calculated as an advance rate (e.g., 90%) of the face value of the purchased AR. So for example, if the total commitment is $12 and we have $10 in AR, we'd only be able to draw up to $9. As we bought more AR, we could draw more up to $12. Not sure if this also applies to equipment collateral but it should. Would just be slightly harder to value the equipment.

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