Transaction Type: Specialized Finance field exam on a multinational container leasing subject for a major lending institution. The $110 million revolving credit facility is governed by a borrowing base consisting of the net book value of equipment.
Significant Finding: The exam uncovered approximately $21 million that has not been attached or linked to a container. These units have been paid for and delivered to the exam subject’s container manufacturers but have yet to be attached to the containers. The loan agreement defines equipment as “marine and intermodal cargo containers and flat racks of all types.” Refrigeration units, particularly the units not linked to containers, do not match the loan agreement’s definition of equipment.
Advancing against refrigeration units not attached to a container raises a few concerns. One is that these refrigeration units are not completed assets (WIP) and are not part of the working fleet. Another concern is that the refrigeration units are in the possession of the exam subject’s largest container vendors. In a worst-case scenario, these vendors could keep the refrigeration units in exchange for any monies owed. There was approximately $22 million in open equipment payables against $21 million in refrigeration units.
These unattached refrigeration units were identified through the review of fixed asset listing. Some units in the listing had no reference linking them to a container. These are the units that have not been attached to a container. Impact on Transaction: The impact was material because the value of these refrigeration units ($21 million) accounts for 19% of the credit facility. This is the first exam on this subject, so this issue had not been identified before. The bank was working on changing the credit facility to address this collateral issue of unattached refrigeration units.
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