Wells fargo capital finance international asset based lending considerations
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Wells Fargo Capital Finance International Asset Based Lending Considerations. September 2011. Confidential – For Discussion & General Information Purposes Only. Asset Based Lending 101. Loans based on the value of collateral A “Borrowing Base” formula determines amount of loan

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Wells Fargo Capital Finance International Asset Based Lending Considerations

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Wells fargo capital finance international asset based lending considerations

Wells Fargo Capital FinanceInternational Asset Based Lending Considerations

September 2011

Confidential – For Discussion & General Information Purposes Only


Asset based lending 101

Asset Based Lending 101

  • Loans based on the value of collateral

    • A “Borrowing Base” formula determines amount of loan

    • Primarily Current assets

    • Formula is a liquidation value

  • Lending in this way permits banks to safely lend to companies with poor credit profiles

  • Permits companies to operate without the need to meet multiple financial covenants


Company example asset based borrower inc

Company Example: Asset Based Borrower Inc.


Key requirements for this to work

Key Requirements for This to Work

  • Collateral Control

    • Accurate collateral values

    • Active monitoring

    • Control cash accounts

  • A favorable legal system

    • Ability to take a clear lien

    • Ability to enforce through the courts efficiently

    • Bankruptcy system favorable


What could go wrong

What Could Go Wrong?

  • Fraud

  • Collateral value estimates wrong

  • Inability to be “first in line”

  • Corrupt courts – failure to enforce the laws

  • If lenders do not have the confidence in their ability to realize on collateral values, they won’t lend


Foreign lending

Foreign Lending


International lending

International Lending

Overview

Are there priming liens?

What changes are necessary in the legal documents?

What factors should be considered for foreign A/R?

Is WFCF or WFB authorized to do business in these countries?

Can WFCF obtain an enforceable security interest?

Can WFCF Lend on Foreign Assets?

What other factors should be considered for foreign inventory?

What questions should be asked during diligence to appropriately screen the transaction?

Can WFCF fund and receive payment in foreign currencies?

Are there different compliance rules?

Who should be contacted on a transaction with foreign components?


International lending1

International Lending

Overview

It Depends….


International lending2

International Lending

Liens/Security Interest

  • Can WFCF obtain an enforceable security interest?

  • In 2010, WFCF Business Finance has funded ~20 deals with International Assets – even more have been discussed and reviewed.

  • Some deals just include foreign A/R of the US Borrower.

  • Some deals include lending to foreign subsidiaries through either Canada or the U.K.

  • Some deals have included foreign currencies.

  • Some deals have been closed using an Ex-Im Facility.

  • Lending on foreign assets is extremely deal specific.

  • The type of foreign asset impacts the answer of whether we are able to lend.

  • The expense and time involved in improving WFCF’s position in the foreign assets, or in pursuing the specific assets, may make it cost-prohibitive for WFCF to actually lend on the foreign assets – economies of scale should be considered.


International lending3

International Lending

  • A/R – Owned by U.S. Borrower

  • U.S. Borrower owns the Foreign Accounts Receivable.

  • Ranking of countries depends on the assessment of whether Wells Fargo would be entitled to claim the proceeds of the receivable if it were to bring a collection action against the foreign account debtor in the account debtor’s country.

  • Would Wells Fargo be permitted to have access to the local courts to bring such action?

  • If so, what is the quality of the courts (in terms of integrity, predictability, and efficiency)?

  • What is the likelihood that the courts would recognize Wells Fargo’s security interest in the receivables and the right to collect it from the account debtor (given that the security interest would be created under U.S. law for a U.S. Borrower)?

  • Would the court require that security interest also be documented to some extent under local secured transactions law for the specific country?


International lending4

International Lending

  • A/R – Owned by U.S. Borrower

  • Assumptions for Ranking of A/R Owned by U.S. Borrowers:

  • U.S. Borrower owns receivables

  • Security interest in receivables is created in loan agreement or security agreement, and thus lender is perfected under U.S. Law and in accordance with UCC.

  • Receivables are expressly governed by U.S. law (the document creating the receivable contains specific language stating that U.S. law (or a state law) governs the documents - Where documents are silent, an element of uncertainty is introduced.

  • When lending on foreign receivables, the credit agreement should expressly require that future receivables be governed by U.S. law.

  • Ranking assumes that Wells Fargo will attempt to collect the receivables directly by suing each foreign account debtor, but as a practical matter, WFCF may be more successful in foreign courts if it first obtains a judgment against the account debtors in the U.S. and then seeks to enforce the judgment against the account debtor in the country in which it resides.

  • While it is more likely that the borrower will file for U.S. bankruptcy. The principles considered here would be relevant because they affect WFCF’s entitlement to the proceeds received by the debtor’s bankruptcy estate.


Wells fargo capital finance international asset based lending considerations

  • A/R – Owned by Foreign Entity

International Lending

  • Analysis assumed that a Foreign Entity owns the Accounts Receivable.

  • It will always be necessary for WF to comply with foreign secured transaction laws. At a minimum, this will typically mean compliance with the laws of the country in which the owner of the receivables (the “grantor”) is organized.

  • In some situations compliance with the laws of additional countries (such as the country whose laws govern the receivables or where the account debtor is located) may be warranted.

  • Because the reasonableness of including foreign receivables is dependent upon the owner, it is very important which entity is the true owner (i.e. receivables in the name of one entity while the inventory giving rise to the receivables was owned by an affiliate).

  • The following questions impact the rating of each country: Would Wells Fargo be permitted to have access to the local courts to bring such action? If so, what is the quality of the courts (in terms of integrity, predictability, and efficiency)? What is the likelihood the courts would recognize WFCF’s security interest in the receivable?


Wells fargo capital finance international asset based lending considerations

  • A/R – Owned by Foreign Entity

International Lending

  • Assumptions for Ranking of A/R Owned by non-U.S. Borrowers:

  • Receivables expected to be governed by local laws depending upon the true ownership of the receivables.

  • Where documents are silent, an element of uncertainty is introduced.


International lending5

International Lending

  • Inventory

  • A security interest in tangible property such as inventory, equipment and real estate is governed to a large extent by secured transactions laws of the country where the property is physically located, and therefore must be documented in accordance with those laws.

  • In order to obtain a valid security interest in foreign inventory, it will be necessary for WFCF to comply with the secured transactions laws of the country in which the inventory is located, regardless of whether the inventory is owned by a U.S. borrower or by one of its foreign subsidiaries.

  • For a U.S. borrower, WFCF will be required to supplement its U.S. security interest with foreign documents.

  • EXAMPLE:

  • Inventory owned by a U.S. Borrower, incorporated in Delaware, but where the inventory is located in Germany.

  • U.S. law (UCC) would require compliance with German laws

  • German laws would require compliance with German laws

  • Lender would comply with both U.S. and German security laws


International lending6

International Lending

  • Inventory

  • When considering foreign inventory for borrowing base purposes, WFCF will need to consider the following:

  • Whether it is possible to obtain a security interest under the laws of the country in which the inventory is located;

  • The characteristics of such security interest (including how it can be enforced);

  • What priority claims could prime WFCF’s security interest in the inventory; and

  • The transaction costs associated with obtaining such a security interest.

  • As with A/R, the decision to include foreign inventory in the borrowing base is extremely deal specific and involves a blend of legal and business considerations that will vary greatly depending on the countries involved and the customers.


International lending7

International Lending

  • Inventory

  • In evaluating the laws of a particular foreign country, it is important to consider the distinction between a “non-possessory” security interest and a “possessory” security interest.

  • A non-possessory security interest is one that permits the borrower to remain in possession

  • of the inventory and use it in the operation of its business.

  • A possessory security interest is one that requires the inventory to be in the possession of the

  • lender, either actually or “constructively” (through possession by the agent or bailee of the lender).

  • The UCC permits both non-possessory and possessory security interests in inventory, as do the laws of many countries. However, in some countries, a non-possessory security interest in inventory is not available, either because the laws do not permit it (e.g., Switzerland), or because a non-possessory security interest is only available to certain types of lenders.

  • A possessory security interest is not viable for Wells Fargo in most circumstances. Countries requiring possessory security interest were not considered ideal, and thus were not ranked as a “1” in the country database that is a supplement to this presentation. Additionally, because a security interest may be available under certain circumstances, these countries have not been ranked as a “4” either.


International lending8

International Lending

  • Inventory

  • Factors contributing to our assessment

  • Quality of the courts – both whether a security interest is possible and whether it is likely that WFCF could enforce a security interest if necessary. In some countries, the quality of the courts varies depending on their location within the country (e.g., Mexico).

  • Is it possible to obtain a security interest in the foreign inventory? If laws in the country either prohibit WFCF from taking a security interest or require government approval, then the country has been ranked as a “4”.

  • Is it possible to develop a “work around” for legal issues, such as security interest or “possessory” security interest?

  • Is the borrower able to grant a security interest in inventory under the laws of the country where the inventory is located?

  • Corporate, tax, and other impediments to obtaining a security interest (e.g., corporate governance rules, U.S. tax issues, financial assistance laws)

  • How can the security interest be enforced? What are the local insolvency laws and their impact? Do the local laws provide for an effective non-judicial sale of the inventory?

  • Priority claims and how they impact the security interest – outside of Canada and the U.S., retention-of-title claims are quite common.

  • Transaction costs, registration fees, and taxes, and

  • Other limitations, such as the repatriation of funds, economic and political situations in each country.


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