While there can be some overlap in duties, field examiners and appraisers, for the most part, have very different responsibilities.
By: AccuVal Associates, Inc.
To mitigate risk when originating asset-based loans, it's imperative to understand fully what the collateral is, how much is there and how it will operate in a distressed environment. Two experts that banks often consult when evaluating a loan are a field examiner and an appraiser.
Field examiners review the adequacy and accuracy of the prospective borrowers' accounting records. The field examiners analyze the performance of accounts receivable and inventory, and they perform procedures to verify the existence, valuation and recording of accounts receivable and inventory collateral. These procedures include reviewing shipping invoices to supporting documentation, including bills of lading and purchase orders, performing test counts of inventory and verifying inventory costs to vendor invoices and cost records. The examiners prepare a borrowing base that reflects the lendable value of collateral after deducting ineligibles from gross collateral and applying advance rates to eligible collateral. The advance rate for accounts receivable is impacted by dilution that represents the portion of billings that are not realized in cash.
Appraisers help lenders understand the value of the collateral in a distressed environment. Most inventory appraisals develop a net orderly liquidation value, which is the estimated value that can be achieved from the sale of the assets in a hypothetical distressed situation, net of any selling costs. As opposed to field examiners, who verify costs and controls, an appraiser provides a picture in time analysis that estimates the value that is expected to be generated from the collateral, once a loan has defaulted and the lender is forced to liquidate.
Appraisers conduct extensive examinations of the collateral, drilling down to the SKU level, based on information received from the borrower. Appraisers assume the information received is factual and do not verify its accuracy. They also synthesize the value-recovery implication of inventory composition, how the nuances of a particular commodity market drive recovery value and the auxiliary effects that complementary markets have on the recovery value of unique collateral. Qualified appraisers have a niche understanding of what a distressed situation will do to the recovery value of working capital and fixed assets. This is a very important perspective to consider when mitigating default risk.
Originating an asset-based loan requires a unique understanding of a company's cost structure, reporting standards, fiscal performance, market placement and what drives the value of a borrower's collateral. When underwriting an ABL revolver, it's important to involve the expertise of both a field examiner and an appraiser.
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.