Transaction Type: Specialized Finance field exam on a multinational container leasing subject for a major lending institution. The $225 million revolving credit facility is supported by a borrowing base consisting of net present value assets and net book value assets.
Significant Finding: In addition to the $225 million credit facility subject to this field exam, the borrower has additional debt facilities (approx. 12), in which assets are pledged as collateral. The exam uncovered that the borrower splits the NPV cash flows generated by a lease to more than one debt facility. The company splits the cash flows for borrowing base reporting purposes into the various debt facilities based on the ratio of units leased. This issued was to be reviewed by bank counsel to determine if the loan agreement permits this practice. This issue was identified through reviewing a sample of NPV leases and obtaining a breakdown of the leased units by debt financier.
Bank concerns about this finding include which lender has the permitted lien on the lease. Another concern is inter-creditor agreements, in which none were in place between the various lenders. Impact on Transaction: The number of leases and the dollar value of leases subject to splitting of cash flows could not be determined. The borrower was to provide a list of leases to the bank. The bank’s counsel was to address the splitting of cash flows to various lenders for collateral reporting purposes.
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