The following is an overview of the Lending on Inventory to Cross-Border Business, held May 13 during SFNet’s International Lending Conference in London.  David Morse, partner, Otterbourg P.C. moderated. Panelists included: John Boxall, Managing Director, Hilco Valuation Services Europe; Christopher M. Chubb, Partner, Mayer Brown International LLP; Elena Egorova, Head of Operations, DRUM Advisory; and Frank Husken, Managing Director, Finterface.

With the uncertainty of the current times, liquidity for businesses will be even more critical.  Consequently, the ability of companies to gain borrowing capacity based on all types of inventory is even more significant than usual. 

At the same time, lending on inventory in different countries or that is in transit between countries, including on the ocean, particularly with the ongoing changes in the costs of importing and exporting goods, in addition to what may be specific legal challenges in any given jurisdiction, requires that the secured lender be particularly thoughtful and diligent in relying on inventory as a potential source of repayment of its loans. 

The panel discussion included consideration of how to address the “cost” of inventory, used as the basic measure for purposes of relying on it, in view of the additional amounts that will be added to the borrowing base as a result of tariffs, and questions of whether the customers or suppliers will absorb some or all of such costs, and other variables that may have the effect of increasing the “cost” of the inventory in the borrowing base (and therefore the amount of it in the borrowing base) at the same time as the threat of recession, inflation and changes in consumer behavior reduce how much may be recovered from the inventory. 

For goods in transit, the panel covered what the lenders should require in order to include such inventory in the borrowing base and how to monitor such requirements including the reporting to require from companies so as  to avoid “double financing” on goods both as in-transit and landed, the management of bills of lading and the advantages and disadvantages of the different types of bills of lading, and the benefits of agreements with freight forwarders. 

Managing retention of title and other potential preferential claims that may adversely affect the secured lender’s recovery were discussed as well as, in the case of goods in transit, taking into account freight and duty that the secured lender might be required to pay and, in the case of enforcement, the possibility of making a floating charge a fixed charge with the engagement by the secured lender of a third party with the ability to establish sufficient “control” over the inventory for such purpose and thereby give the secured lender priority over those claims that might otherwise be entitled to proceeds of the inventory ahead of it.

All in all, there was a wide-ranging and lively discussion about addressing inventory as an asset for secured lenders to rely on in light of current developments and generally.