Supply Contract Securitizes Loan
Client: FDIC (through its failed bank takeover managers)
Challenge: Value Long-Term Supply Contract in Troubled Industry
As the number of bank failures reached triple digits during the recession, problem banks - including one serving the Pacific Northwest - began calling loans to preserve capital. One affected borrower was a third-generation company that supplied concrete, sand and gravel to the construction industry. The bank's demands triggered a cash-flow crisis that put the company in a difficult financial position.
When the bank's operations were taken over by a team from the Federal Deposit Insurance Corporation (FDIC), the FDIC began looking for ways to restore the loan and use the company's assets as collateral. Searching nationally for a company with a reputation for valuing tangible and intangible assets to secure asset-based loans, the FDIC chose AccuVal. The engagement called for AccuVal to appraise a multiyear supply contract negotiated as part of a recent transaction involving the sale of one of the company's gravel pits. It was the desire of the FDIC to consider the value of the benefit stream associated with the supply contract and use this asset as collateral securing the existing loan. The engagement was complicated by a construction industry devastated by very poor economic conditions.
AccuVal Approach
AccuVal examined the company's past usage under the contract and estimated its future usage given the current and forecasted market demand. Also considered was the impact of anticipated government spending in the segment as part of the economic stimulus package. To assist in projecting product pricing, the engagement benefited from AccuVal's depth of specific industry expertise, and management's knowledge of the marketplace and construction projects anticipated in the future. The U.S. Geological Survey was analyzed nationally and by state to identify trends in material costs. Our conclusions were further validated by referencing a variety of resources including the Producer Price Index. Applying a discounted cash flow analysis, we quantified the company's costs if it took advantage of the contract and estimated what it would have to pay without the benefit of the agreement.
Bottom Line: Loan Successfully Collateralized
AccuVal furnished the FDIC with compelling evidence that the supply contract was worth approximately $5 million. The information contained in the report and related value conclusions provided the bank with the confidence that the company's loans were adequately collateralized.
The AccuVal AdVantage™
Deep industry experience. The business acumen to analyze supply contracts and determine their real world value. Authoritative reports that effectively communicate valuation issues and instill confidence. That's The AccuVal AdVantage™ at work.
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