THE NUTS, BOLTS AND WIDGETS

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Presented by the

American Bar Association

Business Law Section,

Young Lawyers Division,

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American Bar Association

Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL 60654-7598

www.americanbar.org 800.285.2221

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The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Business Law Section, Young Lawyers Division, Standing Committee on Paralegals or Center for Professional Development unless adopted pursuant to the bylaws of the Association.

Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only.

This publication accompanies the audio program entitled “The Nuts, Bolts and Widgets of Asset-Based Lending” broadcast on December 9, 2014 (event code: CE1412NBW).

Discuss This Course Online

Visit http://www.americanbar.org/groups/cle/course_content/cle_discussion_boards.html

to access the discussion board for this program.

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T

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ONTENTS 1. Presentation Slides

2. The Nuts, Bolts and Widgets of Asset-Based Lending

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www.americanbar.org | www.abacle.org

The Nuts, Bolts and Widgets of

Asset-Based Lending

Tuesday, December 9, 2014 | 1:00 PM Eastern

Sponsored by the ABA Business Law Section, Young Lawyers Division, Standing Committee on Paralegals and the ABA Center for Professional Development

Panelists

Scott A. Lessne

Program Chair and Moderator Senior Counsel

Crowell & Moring LLP Washington, D.C

June L. Basden

Director

Carruthers & Roth, P.A. Greensboro, NC

C.J. Blagg

General Counsel for Commercial Lending CapitalSource, a division of Pacific Western Bank Chevy Chase, MD

Thomas J. Welsh

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I. Overview of Asset- Based Finance

• Historical Antecedents

• Characteristics of ABL Facilities

–

Secured v. Unsecured Lending

–

Revolving Facility

–

Calculating Amount of Loan

–

Interest Rates and Fees

–

“Evergreen” Nature of ABL Facilities

–

ABL Facilities Match Borrower’s Cash Needs

–

Repayment

I. Overview of Asset- Based Finance

• Underwriting Diligence

– Strength of Borrower’s Collateral

– Examination of Books, Records and Hard Assets

• Asset-Based Lending Terminology

– Eligibility Requirements

– Borrowing Base

– Types of Asset-Based Facilities

• Floor Planning • Factoring • Securitization

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Most Liquid Least Liquid

Cash Receivables _{(all types)} Inventory

Machinery & Equipment

Real Estate

Collateral Liquidity Spectrum

II. Collateral Considerations and Related

Documentation Requirements

• Accounts and Inventory

–

Accounts Receivable

–

Inventory

• Equipment

–

How Defined

–

Lending Structures

• Purchase Money Financing

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II. Collateral Considerations and Related

Documentation Requirements

• Article 9 Considerations – Grant of Security

Interest and Perfection/pre-filing Requirements

–

Description of Collateral

–

Granting of Security Interest

–

Attachment

–

Perfection of a Security Interest

–

Possession/Collateral

II. Collateral Considerations and Related

Documentation Requirements

• Borrowing Base/Eligibility Requirements

–

Borrowing Base

–

Eligibility

• Eligible Accounts

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• The definitions of eligibility and borrowing base

formula limitations reduce the amount of cash advances available to a borrower based on its total pool of accounts and inventory

1. Lender’s will not lend dollar-for-dollar

2. Establishing a balance between collateral quality and lending level is critical and will vary from loan to loan

Total Pool of Assets Perfected Security Interest

Eligibility Criteria Borrowing Base Limitations

Cash Advance Availability

II. Collateral Considerations and Related

Documentation Requirements

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II. Collateral Considerations and Related

Documentation Requirements

• Reserves and Dilution Issues

–

Availability Reserve

–

Dilution Reserve

–

Inventory Reserve

–

Minimum Availability Reserve

–

Rent Reserve

III. Ancillary Documentation and Closing

Considerations

• Conditions Precedent to Closing

• Payoff and Termination Letters

–

Timing and Notice to Existing Lender

–

Release of Debt

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Release and Discharge of Security

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Bank Accounts and Checks

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III. Ancillary Documentation and Closing

Considerations

• Cash Management, Deposit Control Account

Agreements and Lockboxes

• Collateral Access Agreements

–

Landlord Agreements

–

Bailee, Storage, Processing and Other Third

Party Waivers

• Subordination/Intercreditor Agreements

• Insurance Requirements

IV. Monitoring/Administration and

Enforcement

• Collateral Audits

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Bankable Loans

• Decline of Business Operations

• Decline of Collateral Value

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Asset-Based Loans

• Decline of Business Operations

• Decline of Collateral Value

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IV. Monitoring/Administration and

Enforcement

• Article 9 Repossession and Liquidation – Default

– “Commercial Reasonableness” Requirement on Disposition

– Collection and Enforcement Against Rights to Payment – Removal of Accessions and Enforcement Against Fixtures

Collateral

– Other Enforcement Options

– Notices and Accountings Required

– Acceptance of Collateral in Full or Partial Satisfaction – Deficiencies

– Waivers

IV. Monitoring/Administration and

Enforcement

• Bankruptcy Considerations in Enforcement by Secured

Parties

– Automatic Stay and Relief from Stay Issues

– No Lien on Post-Petition Collateral Without

Authorization (Bankruptcy Code § 552)

– Use of Cash Collateral (Bankruptcy Code § 363) and

Adequate Protection (Bankruptcy Code § 361)

– Preferences (Bankruptcy Code § 547)

– Fraudulent Conveyances (Bankruptcy Code § 548)

– Post-Petition Transfers (Bankruptcy Code § 549)

– Setoff Restrictions (Bankruptcy Code § 553)

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Questions?

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ABA WEBINAR

The Nuts, Bolts and Widgets of Asset-Based Lending

December 9, 2014

1:00-2:30 PM Eastern Time

PANELISTS

Scott A. Lessne

Program Chair and Moderator Senior Counsel

Crowell & Moring LLP Washington, D.C.

C.J. Blagg

General Counsel for Commercial Lending CapitalSource, a division of Pacific Western Bank

Chevy Chase, MD

June L. Basden

Director

Carruthers & Roth, P.A. Greensboro, NC

Thomas J. Welsh

Principal

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Scott A. Lessne, Program Chair and Moderator, is a Senior Counsel in the Financial Services

Group of Crowell & Moring LLP’s Washington, D.C. office. Scott’s practice involves the representation of financial institutions in connection with the negotiation and documentation of secured and unsecured commercial, asset-based and real estate loan restructures as well as advising clients on legal issues arising in complex single and multi-lender loan workouts and restructures. In addition, Scott advises financial institution clients on creditors’ rights remedies including judicial and non-judicial enforcement actions and bankruptcy strategies. Scott’s practice also includes structuring, negotiating and documenting new complex commercial loan origination transactions across multiple industries.

His prior experience includes tenure as the senior in-house lawyer at a major global bank

responsible for providing and managing all legal services for the commercial and real estate loan workout division of the corporation. Scott has also served as the General Counsel for the

healthcare finance division of a commercial finance company and more recently as the General Counsel of the finance company’s regulated bank subsidiary. Prior to his in-house experience, Scott was in private practice where he developed his expertise in asset-based lending,

commercial loan restructuring and creditors’ rights. Scott began his legal career as a law clerk to the Superior Court Judges of the State of Connecticut.

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June Basden, is a Director at the Greensboro, North Carolina law firm of Carruthers & Roth,

P.A., is both an attorney and a Certified Public Accountant with more than 27 years of experience in commercial finance and banking law. She represents national, regional and community banks, financial institutions and commercial lenders in a variety of finance transactions, with a special focus on commercial lending and creditors' rights.

June has extensive experience in asset-based lending, factoring and single-lender credit facilities, loan workouts and modifications, foreclosures, bankruptcies and commercial real estate

transactions. She is a fellow of the American College of Commercial Finance Lawyers (ACCFL) – and one of only six ACCFL fellows practicing law in North Carolina. Her clients have found her strategic counsel especially critical in the current financiallandscape as she advocates for ways to achieve the best possible outcome. In 2014, June was named Best

Lawyers 2014 Greensboro Banking & Finance Law “Lawyer of the Year” and was included in Business North Carolina magazine's 2014 "Legal Elite" in both business and bankruptcy law.

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C.J. Blagg is the General Counsel for Commercial Lending at CapitalSource, a division of

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Thomas J. Welsh is a principal of the law firm of Brown & Welsh, P.C. located in Meriden,

Connecticut. He is a Fellow and a former Regent of the American College of Commercial Finance Attorneys, a member of the American Law Institute, a member of the Executive Board of the Association of Commercial Finance Attorneys and is a member of the Connecticut Bar Association, being a member of the Executive Committee of the Commercial Law and Bankruptcy Section and Chairman of the Commercial Finance Section. He has lectured on commercial law and bankruptcy matters and written on commercial law topics. Attorney Welsh is a co-author of E. Weiss, T. Welsh & E. Yen, Connecticut Secured Transactions Under Revised

Article 9 of the Uniform Commercial Code Forms and Practice Manual (2002), rev. to 2010,

published by DataTrace Publishing Company and is a co-author of the 2008 revision to Chapter 5C on Letters of Credit and Negotiable Instruments of Rabkin & Johnson’s Current

Legal Forms With Tax Analysis published by Matthew Bender.

Mr. Welsh was a member of the Connecticut Law Revision Commission advisory committee on the 1999 revision to Article 9 - Secured Transactions of the Uniform Commercial Code and was a primary proponent and spokesperson for the Connecticut Bar Association in the adoption of revised Article 9 in Connecticut. He also authored, and was the spokesperson of the Commercial Law and Bankruptcy Section of the Connecticut Bar Association in the adoption by the

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Table of Contents

I. Overview of Asset-Based Finance ... 1

A. Historical Antecedents ...1

B. Characteristics of ABL Facilities ...2

C. Underwriting Diligence ...4

D. Asset-Based Lending Terminology ...6

II. Collateral Considerations and Related Documentation Requirements for an Asset-Based Loan ... 9

A. Accounts and Inventory ...9

B. Equipment ...11

C. Article 9 Considerations – Grant of Security Interest and Perfection/pre-filing requirements ...13

D. Borrowing Base/Eligibility Requirements ...16

E. Representations and Covenants Peculiar to ABL Facilities. ...22

F. Representations and covenants are made on a continuing basis and are explicitly deemed to be remade with each advance. ...23

G. "Clean-up" Provisions ...24

H. Overadvance Concepts ...25

I. Reserves and Dilution Issues ...25

III.Ancillary Documentation and Closing Considerations... 28

A. Conditions Precedent to Closing ...28

B. Payoff and Termination Letters ...29

C. Cash Management, Deposit Account Control Agreements and Lockboxes ...30

D. Collateral Access Agreements ...30

E. Subordination/Intercreditor Agreements ...30

F. Insurance Requirements ...31

IV.Monitoring/Administration and Enforcement... 32

A. Collateral Audits ...32

B. Fraud and Detection ...35

C. Article 9 Repossession and Liquidation ...36

D. Bankruptcy Considerations in Enforcement By Secured Parties ...41

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I. Overview of Asset-Based Finance

A. Historical Antecedents

1. There are several age old business problems that date back to the earliest days of organized commerce:

a. businesses can be asset rich and cash poor;

b. the need to expand can outstrip the ability to pay for expansion with available cash;

c. sales of assets can be seasonal and/or cyclical; and

d. customers want to pay on credit.

2. The earliest form of asset-based finance was probably a rudimentary form of factoring; the purchase of receivables (current claims for payments due in the future) from a seller of assets or a provider of services.

3. Over time as both legal systems and economies have become more

sophisticated, the use of assets as the basis for obtaining immediate cash has grown into a multi-billion dollar global finance industry.

4. The introduction of Article 9 of the Uniform Commercial Code (“UCC9”) in the early 1960’s created a unitary security device by which a lien on personal property could be created and perfected.

5. Since the enactment of UCC9, the asset-based finance industry has flourished, albeit with ups and downs as the financing and legal structures tend to lag behind rapid economic developments.

6. Factoring, floor planning and traditional asset-based lending were the norm throughout most of the 1960’s, 70’s and 80’s.

a. The typical candidate for an asset-based finance arrangement was a small to middle-market business with cash-flow issues.

b. In the eyes of a traditional “bank” underwriter, many of these candidates were not “bankable” because of their cash flow issues.

c. Companies like CIT, Foothill and Barclay’s, along with a myriad of other smaller specialty commercial finance shops stepped in to fill the

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void, developing financial products based on the strength of a

candidates assets, not its cash flow; ultimate repayment would be from the orderly or forced liquidation of assets.

7. Over time, asset-based finance products evolved as economic conditions changed.

a. Securitizations became a form of high end, sophisticated asset-based product.

b. Companies taking advantage of asset-based financing structures were no longer small or middle market enterprises in dire or near dire financial straits.

c. Asset-based products found their way into large cap leveraged, structured and acquisition finance.

d. At the height of the financial crises, Ford Motor Company obtained a multi-billion dollar asset based loan to help ease cash concerns at this asset rich company; it was the largest asset-based loan to date.

B. Characteristics of ABL Facilities

1. Secured vs. Unsecured Lending

a. Financing facilities not secured by any assets are deemed to be unsecured facilities.

b. Financing facilities secured by a UCC9 security interest may or may not be an asset-based financing facility.

i. Many commercial loan facilities are secured by personal property, but for underwriting purposes, repayment is based on the overall financial strength and cash flow of the business enterprise.

ii. Asset-based financing facilities, on the other hand, while secured by personal property, look to the value of the assets for repayment.

c. A typical definition of an asset-based loan may read as follows: an asset-based loan is a commercial loan that is structured so that the credit extended to the borrower is monitored in relation to the

collateral that has been pledged to support the credit . . . [these loans] are underwritten primarily as revolving credit facilities with

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borrowings limited by specific advance rates against the underlying collateral that generally consists of ever changing pools of assets such as receivables and inventory.

d. Failure of the business enterprise is less relevant for the asset-based lender because of reliance on asset value rather than the financial strength of the business.

e. That is not to say that the financial health of the business does not factor into asset-based underwriting; the value of certain types of collateral is directly related to the health of the industry on which it is used. For example, the value of oil rigs, the basis for many asset-based loans in the 1980s, plummeted when the US oil exploration industry collapsed. While underwriting took into account the

liquidation value of the collateral, having collateral that could not be sold at any price was not an anticipated outcome.

2. Revolving Facility

a. Asset-based loans typically take the form of a revolving loan facility secured by all of the borrower’s personal property assets, i.e.,

borrower’s accounts receivables, inventory, equipment or other assets.

b. Revolving loans will allow a borrower to take advances on the loan when it has assets available to support an advance and will allow the loan to then be repaid as money is collected, and then re-advanced again at a later date. This allows the borrower to draw against the loan as many times as needed up to the lesser of the available “borrowing base,” the note amount or another established sub-limit.

3. Calculating Amount of Loan. The amount of money that a lender will advance against certain types of assets will be directly tied to the liquidity profile of the asset.

MOST LIQUID LEAST LIQUID

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Loan advances will be a percentage of the amount of eligible collateral available (or outstanding in the case of accounts receivable) at any particular time, with the lender establishing eligibility criteria for each asset class.

4. Interest Rates and Fees

a. Interest rates and fees for asset-based facilities are typically higher than those charged by a lender for a more traditional term loan. This is primarily because the lender is taking on a greater administrative burden (e.g., in the form conducting periodic inventory or accounts receivable audits and the borrower’s compliance with various ratios and covenants).

5. “Evergreen” Nature of ABL Facilities

a. Asset-based facilities typically renew automatically from year to year unless one of the parties exercises its termination rights. As the facility revolves, it automatically adjusts to the borrower’s needs (and lender’s corresponding willingness to lend) because it is tied to the borrower’s sales or inventory volume (assuming there is no aggregate dollar cap in the loan agreement). This is in contrast to a standard term loan, which must be repaid (or refinanced) at maturity, whether or not the borrower requires additional capital.

6. ABL Facilities Match Borrower’s Cash Needs

a. Loans are structured to allow borrowers to minimize interest payment by borrowing only what can be supported by the asset base.

7. Repayment

a. Unlike cash flow lending, the asset-based lender is counting on (i) a long-term relationship, (ii) another lender willing to refinance the loan, or (iii) liquidation value of the collateral.

C. Underwriting Diligence

1. Strength of Borrower’s Collateral

a. Receivables and Inventory Ratios. Unlike traditional “financial statement” lending, the lender’s diligence in an asset-based arrangement will not focus on the borrower’s liquidity, leverage, solvency and profitability ratios. Rather, diligence and willingness to lend will focus on the strength of the borrower’s receivable or

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inventory turnover ratios because these assets will form the collateral base from which the borrower’s borrowing base can be derived.

b. Implementation of Collateral Monitoring. The ability to obtain the requisite number of audits and field exams is critical to maintaining accurate and current information about the collateral.

c. Collateral Accessibility. Access to the collateral post-default is key to a successful exit strategy. Impediments to access known at the underwriting stage will potentially change the lending formula.

d. Local Legal Impediments. Peculiarities in the local law, both state and federal, of the jurisdiction where rights and remedies are to be

exercised may have an impact on the structure of the loan and loan availability.

2. Examination of Books, Records and Hard Assets

a. The lender also must conduct a thorough examination of the accounts receivable/inventory/equipment to determine if there is sufficient “eligible” collateral to support the borrower’s stated credit needs. Such diligence typically involves an examination of the borrower’s books and records as well as a field exam to “count” the inventory.

b. The most problematic issues for an asset-based lender arise in fraud at the time the financing is entered into, or during the ongoing

administration of the credit.

i. Fraud can come in the nature of inventory miscounts, or can be as extreme as “empty” boxes of finished goods in the

warehouse.

ii. Receivables fraud can arise in a variety of ways:

(a) falsified sales data and collection documentation

(b) use of the same receivables to obtain financing from more than one lender

(c) diversion of cash or collateral proceeds

(d) misrepresentation of purchase orders

(e) intentionally mis-aging receivables

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(f) delay in collections reporting to artificially boost receivables

(g) creation of fictitious receivables

(h) pre-billing

D. Asset-Based Lending Terminology

1. Eligibility Requirements. By nature, asset-based lending will in all cases depend on the collateral made available by the borrower. The borrower’s ability to borrow against its assets will be subject to a formula which is based on the quantity and quality of its assets (i.e., receivables or inventory). Eligibility requirements will be carefully established in the loan agreement. Some requirements are generic to all loans while others are industry specific.

2. Borrowing Base. The “borrowing base” is the total amount available to be borrowed at a given time and is dependent upon what constitutes “eligible” collateral. Typically, the “borrowing base” serves as a mandatory prepayment trigger – if the amount outstanding at any time exceeds the borrowing base, the borrower is required to pay the excess or provide additional collateral.

3. Types of Asset- Based Facilities

4. Floor Plan Financing

a. Under a “floor planning” arrangement, the loans are made against the security of specific identifiable assets, usually constituting the

inventory of a seller of goods. Typically such arrangements are used

Total Pool of Assets Perfected Security Interest

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to finance dealer inventories for items such as automobiles and home appliances.

b. Although there is typically an outside date, the loan is paid off upon the sale of the subject asset.

5. Factoring

a. What is Factoring?

i. Factoring is the sale or transfer of title in specific accounts receivable at a discount and is most common in the

manufacturing and retail sectors.

b. Factoring Arrangements

i. Factors assume the credit risks relating to receivables by purchasing them without recourse, thus extending credit to their clients’ customers.

ii. Because factors bear the credit risk of the transaction, factors will require that their clients obtain approval of the amount, terms, delivery date and other conditions of each sale to a purchaser.

iii. The end-purchaser of the product is notified (typically by a legend printed on invoices) that the factor has purchased the receivables and that payments should be made directly to the factor. The borrower must immediately notify the factor of any remittances made directly to the borrower and factoring

agreements typically provide that borrower holds any such funds as trustee for the benefit of the factor.

6. Securitization

a. Securitizations take the form of a sale of receivables to the lender, typically on a “batch” basis (i.e., a certain number of receivables at specified intervals), rather than a loan secured by the borrower’s receivables.

b. The borrower retains the obligation to collect on the receivables and settles up with the lender at specified intervals.

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c. Securitizations are known as “off balance sheet” financing, in that the arrangement, from an accounting perspective, is structured as a sale rather than a loan.

7. Other Types of Asset-Based Transactions

a. equipment leasing

b. purchase of chattel paper, payment intangibles, promissory notes

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II. Collateral Considerations and Related Documentation Requirements for an Asset-Based Loan

A. Accounts and Inventory

1. Accounts Receivable. While there are other types of properties that can be the "assets" in asset based loans, accounts receivable and inventory are most often considered appropriate collateral. The frequent borrowings and repayments of asset based loans depend on the liquidity of accounts receivables and

inventory.

a. What is an account receivable or account? The Uniform Commercial Code ("UCC") defines Account as follows:

"Account" . . . means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated or sponsored by a State, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health-care-insurance receivables. The term does not include (i) rights to payment evidenced by chattel paper or an instrument, (ii) commercial tort claims, (iii) deposit accounts, (iv) investment property, (v) letter-of-credit rights or letters of credit, or (vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card.

9-102(a)(2)

b. Borrowers generally use accounts receivable financing when there is a mismatch between collection of receivables (sources of cash) and expenditures necessary to conduct the business, such as payroll and replenishment of inventory. Today more companies delay payment of receivables to stretch their own cash flow, which can hamper a

growing business. But cash shortages don't always indicate a thriving

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business. Cash flow shortages can also be early warning signs of a failing business. The lender must have done its due diligence and know where on the spectrum the borrower lies. See Section IV below for further discussion.

2. Inventory

a. What is inventory? The UCC defines Inventory as follows: "Inventory" means goods, other than farm products, which:

(A) are leased by a person as lessor;

(B) are held by a person for sale or lease or to be furnished under a contract of service;

(C) are furnished by a person under a contract of service; or

(D) consist of raw materials, work in process, or materials used or consumed in a business.

9-102(a)(48)

b. Because inventory is a subset of goods, then we must determine what "goods" are.

i. "Goods" means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (I) the program is

associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term does not include a

computer program embedded in goods that consist solely of the medium in which the program is embedded. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction.

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9-102(a)(44)

ii. A security interest in inventory may be limited to a specific item or items of inventory or may include all inventory and may include inventory acquired in the future. 9-214(a). A security interest in inventory automatically attaches to proceeds of inventory which would include accounts receivable.

Proceeds include whatever is received when the inventory is sold, leased or otherwise disposed of. A lender considering providing a line of credit based on accounts must determine not only if there are existing security interests in accounts but also if there are security interests in inventory. If security interests in inventory are effective, without a release or lien

subordination, the lender proposing to make loans based on the value of inventory may not receive a first priority lien in proceeds.

iii. Property in the hands of one debtor may be inventory and in the hands of another debtor may be equipment. For instance, if the debtor is a farmer, the truck that takes produce to market is probably equipment. However, if the debtor operates a car dealership, then the truck is probably inventory (held for sale or lease).

B. Equipment

1. Equipment is defined by exclusion and is defined as goods which are not consumer goods, inventory or farm products. Equipment is often not easily converted to cash and, while included as collateral for asset based loans, its relative illiquidity requires its value to be considered and used differently than accounts and inventory.

2. When equipment is included as collateral in asset based lending transactions, there are several forms of lending structures which may be used, depending on the needs of the borrower and other factors:

a. purchase money - capital expenditure/equipment line of credit

b. term loan - equipment and sometimes other capital assets (real estate) serve as security for a term loan facility

c. additional collateral for revolving line of credit

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3. Purchase Money Financing - This type of financing occurs when the lender provides funds to its borrower for purchases of equipment. 9-103(a)(2) defines "purchase money obligation." The "obligation" may include not only the actual price of the equipment but also expenses incurred in connection with the purchase, such as sales taxes, freight charges, etc. ("soft costs"). Purchase money financing allows the lender to obtain purchase money priority in non-inventory collateral if the lender properly perfects its security interest by filing a financing statement not more than 20 days after the borrower receives possession of the equipment 9-324(a). If perfected, the lender's security interest will have priority over other conflicting security interests in the collateral (i.e., after acquired property provisions) even though other creditors may have earlier filed financing statements.

a. Comment 3 to 9-324 helps determine when "possession" occurs if the borrower takes delivery in stages with assembly occurring after delivery. In this situation, the buyer takes "possession" after the equipment has been inspected. However, when "possession" occurs and triggers the 20 day filing deadline is not always clear.

4. Term Loan Facility - If equipment serves as the collateral for a term loan, the lender must consider that the value of equipment generally declines as the equipment ages, is used, and/or becomes obsolete. Repayment of loans based on equipment values thus must be paid from the cash flow of the borrower. While the initial loan is based on the value of the equipment, a lender will require that the borrower have sufficient cash flow for payments at least equal to the depreciation of the equipment. The "value" of the equipment can vary however it is most often determined by the liquidation value of the equipment, which assumes a short sale period.

a. With both equipment lines of credit and term loans, if equipment is sold, the net proceeds from the sale of any such equipment should be paid to the lender to either increase availability under an equipment line of credit or applied to last maturing installment under the term loan. If the borrower uses proceeds to purchase additional equipment in which the lender will have a first priority security interest, the lender may not require it receive the proceeds from the sale but should insure it maintains its perfected lien in the replacement equipment. De

minimus sales of equipment are sometimes permitted without the

lender's consent and/or without the payment of proceeds from the sale of the equipment to the lender.

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C. Article 9 Considerations – Grant of Security Interest and Perfection/pre-filing requirements

1. Description of Collateral – When describing the collateral in the granting instrument, the collateral description can be relatively broad or narrow; however, very broad descriptions in the granting instrument such as "all assets" or "all personal property" will not be effective to reasonably identify the property. 9-108(c).

a. The description of the collateral in the financing statement doesn't have to be as specific as the description in the security agreement. The security agreement describes the personal property or types of personal property to be encumbered while the financing statement puts third parties on notice that a security interest exists. Section 9-504 provides that the more generic collateral description in a financing statement is sufficient if the security agreement provides sufficient definition of collateral so a security interest can attach.

2. Granting of Security Interest - The security agreement can be simple or complicated but it doesn't have to be complicated to be effective as long as it contains the following required elements.

a. The Grant of a Security Interest - The granting language in a security agreement is usually straight forward:

i. "The Borrower hereby grants to the Lender, to secure the payment and performance in full of all the Obligations, a security interest in and pledges and assigns to the Lender, the following properties, assets and rights of the Company,

wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the

foregoing being hereinafter called the "Collateral"):"

ii. The security agreement would then describe the types or classes of assets in which the lender is to receive a security interest.

b. A Description of the Collateral – The list of personal property included in the definition of "Collateral" is often the types or classes of assets defined in the UCC. Often, if the lender intends to receive a security interest in all the personal property of the borrower, the description of the collateral will include a general phrase such as "all personal property of every kind;" however, it is imperative that the security

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agreement include a specific list of the asset types or classes such as accounts, goods, instruments, etc.

c. An Authentication by Debtor - The debtor must sign or otherwise indicate its acceptance of the security agreement. "Authenticate" is defined in the UCC to mean either (a) to sign or (b) with present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process. 9-102(a)(7). A "record" is defined as information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. 9-102(a)(70)

3. Attachment

a. When the security interest becomes enforceable against the debtor, it is called attachment. 9-203(a). For a security interest to attach, the following events must occur: (a) value is given by lender, (b) the debtor has rights in the collateral and (c) either (i) the debtor authenticated a security agreement, (ii) the collateral is not a certificated security and is in the possession of the secured party pursuant to 9-313 pursuant to security agreement, (iii) collateral is a certificated security in registered form and the certificate is delivered to the secured party pursuant to 8-301 pursuant to security agreement, or (iv) the collateral is deposit accounts, electronic chattel paper, investment property or letter of credit rights and the secured party has control under 9-104, 9-105, 9-106 or 9-107 pursuant to the security agreement. 9-203(b)

b. Attachment is important because attachment of a security interest gives the lender rights in the collateral and proceeds of the collateral. 9-315

4. Perfection of a Security Interest

a. In order for the security interest to be effective against the borrower, third parties and others claiming through the borrower, such as a trustee in bankruptcy, the security interest must be perfected. Section 9-308 provides a security interest is perfected if (a) it has attached and (b) the steps for perfection in 9-310 through 9-316 have been satisfied.

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b. Elements to attain "perfection:"

i. Section 9-310 - provides as a general rule that perfection requires that a financing statement must be filed. Other sections (9-311 through 9-316) provide rules for perfection of security interests in particular types of property such as chattel paper, deposit accounts, and when filing isn't necessary, for instance when the secured party has possession of the personal property.

ii. Section 9-310 says you should file a financing statement but where should it be filed? The "where" is determined by the debtor's location. Section 9-307(b) provides the "location" of a debtor/borrower is determined as follows:

(1) A debtor who is an individual is located at the individual's principal residence.

(2) A debtor that is an organization and has only one place of business is located at its place of business.

(3) A debtor that is an organization and has more than one place of business is located at its chief executive office.

iii. However, if the debtor is an entity that registers under a state law to be formed, then Section 9-307 provides "the registered organization that is organized under the law of a State is located in that State." Before the 2001 amendments to the UCC, financing statements were filed in each jurisdiction in which the debtor's assets were located and some of those jurisdictions required filing in both a central office, such as a secretary of state, and a local office, such as a register of deeds, to perfect security interests in the property located in those jurisdictions. Now, only one filing is necessary - a filing in the office designated by the state in which the debtor was

organized.

5. Possession/Control

a. When is possession of personal property necessary or desirable for perfection of a security interest? Section 9-313 provides that, with limited exception, "a secured party may perfect a security interest in negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral." A secured party may perfect a security interest in certificated securities by taking delivery of

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the certificated securities under Section 8-301. But wait - it says "may." Does that mean it is optional? When considering how to perfect security interests in instruments, certificated securities, tangible chattel paper, and goods, a financing statement can be filed but

possession will result in the secured party with possession having priority over a secured party perfected only by filing. 9-312(a), 9-304, 9-305 and 9-308. Money is a type of collateral in which a security interest can only be perfected by possession.

b. With some types of property, control is the only method of perfection. A common type of collateral in asset based loans is a deposit account. Other types include investment property, electronic chattel paper and letter of credit rights. Each of the UCC sections dealing with control of an asset class describe how control is achieved. For instance, "control" of investment property contemplates delivery of the property if certificated, an agreement by the issuer of uncertificated securities that the issuer will honor instructions from the lender without further consent of the borrower and an agreement by a bank or other securities intermediary holding a securities account that it will instructions from the lender without further consent of the borrower.

D. Borrowing Base/Eligibility Requirements

1. What is a borrowing base? The borrowing base is the sum of the amounts the borrower may borrow against the collateral and has several components. Together with the maximum credit facility, the borrowing base limits the amount a borrower can borrow at any one time. The maximum is usually described as the lesser of (1) the revolving line of credit amount or (2) the borrowing base (i.e., the sum of 80% of the value of Eligible Accounts plus 50% of the value of Eligible Inventory) less the principal amount of the revolving loans then outstanding. Other deductions from the borrowing base are discussed below.

2. What collateral is included in the calculation - concept of eligibility

a. All Accounts are not treated equally for purposes of borrowing against their values. An Account owing by an account debtor in bankruptcy will not be as valuable to the borrower or the lender than an Account owing by a non-bankruptcy account debtor. Eligibility criteria are generally lengthy and detailed, especially in loan transactions where the facility is extended pursuant to a commitment and the lender must lend on the eligible collateral (as contrasted with discretionary

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facilities where the lender may or may not advance funds based on its discretion). The definition of Eligible Accounts generally starts by including all Accounts, then describing general minimum requirements for inclusion, and then listing the exclusions from eligibility. Below are some common eligibility criteria for Accounts with brief

explanations.

i. Eligible Account - an Account which arises in the ordinary course of Borrower's business from the sale of goods or rendition of services, is payable in Dollars, is subject to Lender's valid and duly perfected first priority Lien, and is deemed by Lender, in its discretion based on its usual and customary credit and collateral considerations, to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if:

Account Eligibility Criteria Explanation/Purpose it arises out of a sale made by a Borrower to a

Subsidiary or an Affiliate of any Borrower, or a Person controlled by an Affiliate of any Borrower

prevents advances against intercompany transactions, which may be more easily manipulated and less likely to be paid it is due or unpaid more than (x) 60 days after the

original due date shown on the invoice or (y) 90 days after the original invoice date

ensures Lender isn't advancing against old Accounts for which collection may be doubtful; prevents extended dating

20% or more of the aggregate amount of unpaid Accounts from the account debtor are deemed not to be Eligible Accounts hereunder

if more than the stated percentage of the accounts are ineligible, the lender can exclude the

remainder which could prevent the lender from having to advance against new accounts owing by an account debtor in financial distress (often referred to as "cross-age"

the aggregate amount of unpaid Accounts from the account debtor exceeds 10% of the aggregate amount of all Eligible Accounts or exceed a credit limit established by Lender for such account debtor, in each case, to the extent of such excess

this prevents a concentration of loans based on the credit worthiness of a single account debtor. This percentage may vary by account debtor,

depending on financial strength or weakness

any covenant, representation or warranty

contained in this Agreement with respect to such Account has been breached

ensures the representations and covenants in the loan documents relating to Accounts are true (i.e., borrower is the owner of the account; lender has a perfected first priority lien)

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Account Eligibility Criteria Explanation/Purpose the account debtor is also Borrower's creditor or

supplier, or has disputed liability with respect to such Account, or has made any claim with respect to any other Account due from such account debtor to Borrower, or the Account otherwise is or may become subject to any right of setoff,

counterclaim, recoupment, reserve, defense or chargeback,

ensures the Account will be paid in full and not subject to set off or dispute; generally ineligibility limited to the amount of the dispute, setoff, etc.

an Insolvency Proceeding has been commenced by or against the account debtor or the account debtor has failed, suspended or ceased doing business

excludes all Accounts owing by a bankruptcy account debtor, whether pre- or post-petition

the account debtor is not solvent if the account debtor is insolvent (not able to pay debts as they become due; fair market value of liabilities greater than fair market value of assets; unreasonably small capital) payment to Borrower is doubtful

the account debtor is organized under the laws of any jurisdiction outside of the United States or has its principal office, assets or place of business outside the United States, except to the extent that the Account is supported or secured by a letter of credit or credit insurance that is acceptable in all respects to Lender and duly assigned to Lender

considers the lower likelihood of collection from a foreign account debtor

it arises from a sale to the account debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis

considers the inventory sale giving rise to the Account may be returned

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Account Eligibility Criteria Explanation/Purpose the account debtor is the United States of America

or any department, agency or instrumentality thereof, unless the applicable Borrower is not prohibited from assigning the Account and does assign its right to payment of such Account to Lender, in a manner satisfactory to Lender, so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. §3727 and 41 U.S.C. §15), or is a state, county or municipality, or a political

subdivision or agency thereof and Applicable Law disallows or restricts an assignment of Accounts on which it is the account debtor

contracts with the United States giving rise to Accounts are subject to specific requirements not found in the UCC; many states have explicit restrictions on the assignability of accounts owing by them (the prohibitions override the free assignability provisions in the UCC)

the account debtor is located in any state which imposes conditions on the right of a creditor to collect accounts receivable unless the applicable Borrower has either qualified to transact business in such state as a foreign entity or filed a Notice of Business Activities Report or other required report with the appropriate officials in such state for the then current year

some states have provisions which prohibit a party from availing itself of use of the court system unless the party is qualified to do business in such state or has filed required reports.

the Account is subject to a Lien other than a Permitted Lien

if the Account is subject to a prior lien, proceeds of the collection should be paid to prior

lienholder; if Lender receives the proceeds the proceeds may be subject to the prior lien the goods giving rise to such Account have not

been delivered to and accepted by the account debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the account debtor or the Account otherwise does not represent a final sale

non-acceptance of goods and non-performance of services give rise to defenses; as assignee, Lender takes assignment subject to defenses, set offs, etc. to which borrower is subject

the Account is evidenced by Chattel Paper or an Instrument of any kind, or has been reduced to judgment

if evidenced by chattel paper or instrument, the debt is not an Account

the Account represents a progress billing or a retainage or arises from a sale on a cash-on-delivery basis

borrower's performance is not complete

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Account Eligibility Criteria Explanation/Purpose Borrower has made any agreement with the

account debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or

allowances are reflected in the calculation of the face value of each invoice related to such Account

if outside the normal course and not reflected on the invoice, discounts and deductions dilute the value of the Account

Borrower has made an agreement with the account debtor to extend the time of payment thereof

payment terms may be changed for any number of reasons but a change to accommodate an account debtor's deteriorating financial condition should be monitored; extensions of due dates may have a material effect on borrower's ability to repay the advances

the Account represents, in whole or in part, a billing for interest, fees or late charges, provided that such Account shall be ineligible only to the extent of the amount of such billing

lender should finance inventory replacement or buildup and sales of that inventory; inclusion of interest and other charges inflates the face amount of the account

b. As with Accounts, Inventory has its own set of eligibility criteria.

i. Eligible Inventory - Inventory which is owned by Borrower (other than packaging or shipping materials, labels, samples, display items, bags, replacement parts and manufacturing supplies) and which Lender, in its discretion based on its usual and customary credit and collateral considerations, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory unless:

Inventory Eligibility Criteria Explanation

it is finished goods easiest to sell; in some circumstances, raw materials may be eligible Inventory; a lender doesn't want to advance on inventory that needs further work before it can be sold and an Account created

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Inventory Eligibility Criteria Explanation it is held for sale or lease by Borrower in the

ordinary course of business and it is not held by Borrower on consignment from or subject to any guaranteed sale, sale-or-return, sale-on-approval or repurchase agreement with any supplier

if inventory is owned by a third party yet is in borrower's possession, lender's lien can't attach and inventory is subject to repossession by owner

is not damaged, defective, shopworn or otherwise unfit for sale or lease

inventory must be saleable

it is not slow-moving, obsolete or unmerchantable and is not goods repossessed from an account debtor;

slow-moving or obsolete inventory that isn't saleable should be written off by borrower; increases in obsolete inventory or write-offs often provide warning to lender re liquidation values, life cycle of borrower's business

it meets all standards imposed by any

Governmental Authority and does not constitute hazardous materials under any Environmental Law

inventory not meeting specific standards and specifications is subject to return or rejection by purchaser

it conforms in all respects to the warranties and representations set forth in this Agreement and is fully insured in the manner required by this Agreement

ensures the representations and covenants in the loan documents relating to Inventory are true (i.e., borrower is the owner)

it is at all times subject to Lender's duly perfected, first priority Lien and no other Lien except a Permitted Lien

if the Inventory is subject to a prior lien, proceeds of the collection (i.e., the Account) may be subject to the prior lien

is not in transit or outside the continental United States and is not consigned to any Person (excluding Inventory in transit in the continental United States between Borrowers or their Subsidiaries and customers of Borrowers or their Subsidiaries in the Ordinary Course of Business)

considers the risk of loss of inventory in transit to a buyer and the likelihood of not being able to easily retrieve inventory outside the US; consigned inventory difficult to monitor and control

it is not the subject of a negotiable warehouse receipt or other negotiable Document

such inventory is not in the control or possession of borrower and requires delivery of a negotiable document to obtain possession

it has not been sold and Borrower has not received any deposit or downpayment in respect thereof in anticipation of a sale

inventory subject to bill and hold or similar arrangement isn't owned by borrower and should be segregated from owned inventory

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c. What are the appropriate advance rates against eligible collateral - generally, a lender will advance between 80%-85% of the value of Eligible Accounts and between 50%-60% of the value of Eligible Inventory. The appropriate advance rates depend on the underwriting of the credit facility (see Section IV below) and the liquidation value of the asset category. Less cushion is needed for loans against Eligible Accounts than for Eligible Inventory because accounts are more readily converted to cash than inventory, which has not yet been sold, resulting in higher advance rates against accounts.

d. What is the maximum revolving credit facility made available to the borrower - the maximum credit facility depends on the borrower's needs, the eligible collateral and the lender's underwriting criteria. See Section IV below

e. Are there other amounts to be added or deducted from the borrowing based calculation - see paragraph F of this Section II

E. Representations and Covenants Peculiar to ABL Facilities. Certain representations and covenants appear in almost all loan agreements. These include but are not limited to representations and covenants as to the borrower's corporate/limited liability company good standing or existence in the state of its formation and in other states in which it must be authorized to do business, authority to enter the loan documents, completeness of financial statements provided to the lender, and the existence of no litigation. However, there are certain representations and covenants that are peculiar to asset based facilities relating to the collateral and its value.

1. Collateral

a. borrower owns the collateral

b. the collateral is and will be insured against loss or damage

c. lender will have the right to obtain updated appraisals (both inventory and equipment)

d. borrower will preserve the value of all collateral

e. will be located on the premises disclosed to lender

2. Accounts

a. accurate and complete records of accounts and all payments

b. no undisclosed discounts, disputes, returns

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c. authority of lender to verify accounts

d. maintenance of deposit account to receive proceeds of accounts (not always required)

3. Inventory

a. accurate and complete records of inventory purchases and withdrawals

b. returns promptly disclosed to the lender

c. no consignment, bill and hold inventory

d. borrower will produce, use, store and maintain all Inventory with all reasonable care and in accordance with applicable law

e. Equipment

f. accurate and complete records and schedules of equipment

g. dispositions only as permitted pursuant to the provisions of the loan agreement or as otherwise consented to by lender in writing

h. maintain and preserve in good operating condition and repair, and all necessary replacements of and repairs thereto, normal wear and tear excepted

F. Representations and covenants are made on a continuing basis and are explicitly deemed to be remade with each advance.

1. The lender may rely on borrowing base as to which accounts and what inventory are eligible and that all accounts and inventory, unless disclosed otherwise, meet the eligibility criteria

2. Each Account:

a. is genuine and not evidenced by a judgment

b. arises out of completed sale of goods or rendition of services in the borrower's ordinary course of business

c. is for sum certain

d. lender's lien in the account won't be subject to offset, lien, deduction, defense, dispute, counterclaim

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e. the contract under which the account arose doesn't prohibit assignment of the account unless consent of account debtor obtained

f. no agreement for any extension, compromise, settlement or modification of the account or any deduction therefrom, except

discounts or allowances which are granted by borrower in the ordinary course of its business

g. no facts known to borrower which would impair collectibility of the account

h. to the best of borrower's knowledge, the account debtor had the capacity to contract and is solvent and borrower has no knowledge that account debtor's financial condition has suffered a material adverse change

i. visits and audits

j. no other liens except as specifically permitted

3. Inventory:

a. will be located on the premises disclosed to lender

b. will not be stored with a bailee, warehouseman or similar party without Lender's prior written consent

c. will be new Inventory of good and merchantable quality, free from defects.

G. "Clean-up" Provisions

1. An asset based lender may expect there will be loans outstanding during the entire term of the line of credit. Often a borrower is penalized for failure to use the full line of credit by the imposition of an unused line fee.

Theoretically, if a lender has committed to its borrower that it will have the funds available to loan to the borrower, when the borrower doesn't use, or under uses, the line of credit, the lender hasn't achieved the return on its funds it expected. Conversely, there may be circumstances under which the lender may want a borrower to repay the loans in full for a limited period of time. This required repayment, or "clean up," may be appropriate if a lender, such as a bank, has less stringent monitoring requirements (i.e., fewer borrowing base certificates and audits of the collateral) and further has the expectation that the loans will be repaid primarily from operating cash flow and not from the collection of accounts and the sales of inventory. Often the "clean up"

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period is selected so that the payout, usually for a 30 day period, is to occur when the borrower's need for cash is typically low. Smaller financial

institutions with fewer monitoring capabilities might require the "clean up" to assure itself that the borrower, in fact, has the ability to repay the line of credit at maturity.

H. Overadvance Concepts

1. If the total revolving loans exceed the borrowing base, an "overadvance" exists and the amount of the overadvance is required to be paid immediately. For example, an overadvance may arise when there is a limit on the amount of loans which may be outstanding based on the value of inventory (i.e. 50% of the total loans outstanding) and there is a large payment on accounts without a similar increase in sales.

2. Overadvances may arise because of the seasonal nature of the borrower's business. The borrower may require a large build up of inventory to meet future demand and sales aren't currently projected. For instance, a fireworks manufacturer may spend the winter months building inventory for July 4 celebrations; however, sales of the inventory are anticipated to occur for many months. If the borrower and lender have not planned for such seasonality, overadvances will occur annually.

3. Additionally, overadvances may be a warning sign of a failing borrower. Inventory may remain unsold or collections of accounts may be doubtful. Recurring and unpaid overadvances should be closely monitored.

I. Reserves and Dilution Issues

1. Reserves against availability under a line of credit can be established for a variety of reasons. In most ABL transactions, there will be, at minimum, a general availability reserve. The reserve does what it says - it subtracts from amounts otherwise available under the borrowing base formula amounts the lender considers may be necessary to be paid (i.e., to pay rent for the location at which books and records relating to accounts and inventory and equipment is located so the lender can access its collateral), to account for changes in financial condition, or which the lender believes will affect the value of the collateral. Below are some examples of reserve provisions.

2. Which reserves are established is dependent on the financial strength of the borrower, underwriting requirements, the materiality of the potential payment and other factors. For instance, if the borrower has one location and a modest rent/lease payment or the landlord is an affiliate of the borrower, the lender

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may agree a rent reserve isn't needed; however, if the borrower has multiple retail locations with relatively high rents plus obligations for repair,

maintenance, taxes, insurance, and common area expenses, not reserving for the payment of those amounts following an event of default could result in a significant expenditure which the lender will be forced to advance as an additional loan.

a. Availability Reserve - on any date of determination thereof, the

amount equal to the sum of: (i) the Minimum Availability Reserve, (ii) the Inventory Reserve, (iii) the Rent Reserve; (iv) the Dilution

Reserve; (v) any amounts which the Borrower is obligated to pay to Lender or other Persons pursuant to the provisions of any of the Loan Documents that Lender elects to pay for the account of the Borrower in accordance with authority contained in any of the Loan Documents; (vi) the aggregate amount of reserves established by Lender from time to time in its sole discretion in respect of Banking Relationship Debt [hedging obligations; credit cards; cash management agreements with the lender or any of its affiliates]; (vii) the aggregate amount of all liabilities and obligations that are secured by Liens upon any of the Collateral that are senior in priority to Lender's Liens if such Liens are not Permitted Liens (provided that the imposition of a reserve

hereunder on account of such Liens shall not be deemed a waiver of the Event of Default that arises from the existence of such Liens) or are Permitted Liens under the Loan Agreement; and (viii) such additional reserves, in such amounts and with respect to such matters, as Lender gent in its discretion may elect to impose from time to time.

b. Dilution Reserve - an amount equal to the excess of (i) non-cash reductions to Borrowers' Accounts during a 12-month period prior to the date of determination as determined by Lender, expressed as a percentage of Borrowers' Accounts outstanding during the same period over (ii) 5%, multiplied by an amount equal to Eligible Accounts as of the date of determination.

c. Inventory Reserve - such reserves as may be established from time to time by Lender with respect to reflect changes in the salability of any Eligible Inventory in the ordinary course of Borrower's business or such other factors as may negatively impact the value of any Eligible Inventory. Without limiting the generality of the foregoing, such reserves may include reserves based on obsolescence, seasonality, theft or other shrinkage, imbalance, change in composition or mix, markdowns, and vendor chargebacks.

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d. Minimum Availability Reserve - a reserve in the amount of $___________.

e. Rent Reserve - on any date, the aggregate of (i) all past due rent, fees or other charges owing on such date by the Borrower to any landlord of any premises where any of the Collateral is located or to any processor, repairman, mechanic or other person who is in possession of any Collateral or has asserted any Lien or claim thereto, and (ii) a reserve equal to 3 months rent or other charges with respect to any Collateral in the possession of, or at a location owned by, a Person other than a Borrower if such Person has not duly executed and delivered to Lender a landlord's lien waiver satisfactory to Lender.

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