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One Deal Can Seriously Impair Your Portfolio -- Understanding Collateral

Date: Aug 18, 2015 @ 07:00 AM
Filed Under: Asset Management

Collateral value can also be influenced by currency fluctuations. For example, the appreciated dollar has caused the value of computer numerical control (CNC) machines to diminish. Compared to a year ago, the dollar is much stronger than the yen which has caused the price of new CNC equipment from Japan to decrease up to 30%. The lower pricing of brand new equipment has had a significant trickle down impact on the price of used equipment.  The same problem exists for American producers who export a large percentage of their product, as the strong dollar makes the export market extremely expensive for the overseas buyer.

Resource for the Lender and Field Exam Team

We find it most helpful to go on-site with lenders and field examiners to help them understand the collateral. Excluding the slow-moving items or work-in-process from a borrowing base does not always tell the most accurate story. Appraisers are able to more reliably determine which goods are salable and which are not. At times, the company may not be selling a particular product despite the fact that a market for it exists, albeit at a different price point. Appraisers can also be a great resource for helping the company find a home for this excluded inventory. For example, our firm buys returned, aged or distressed consumer electronics, technology assets and other consumer goods. Our ability to purchase this product gives us a unique perspective on recovery values, while also helping your borrower turn ineligible inventory into cash.

After the visit the appraiser and the field examiner are able to compare notes and make sure the structure of the appraisal aligns with the borrowing base. This saves the lender time at the end of the process not having to go back to the appraiser asking to exclude or include certain items. These conversations allow the lender to get documentation to credit committee quicker and get deals closed.

One Size Does Not Fit All

We work closely with many commercial lenders and bank workout groups and are often asked: “We have this customer and have been lending 50% on the inventory assets, are we good?” The answer always depends on the asset class and the composition of the inventory. My first appraisal when starting at HYPERAMS in March 2014 was in response to one of these calls. After seeing the data I knew immediately the lender was in trouble. Why? Because 80% of the inventory was work-in-process that took  three months to complete in a manual environment. Our appraisal report gave recoveries substantially less than the advance rate. If the lender had retained a qualified appraiser – even though this was a credit under $1 million – to complete a valuation and subsequent monitoring, its ultimate recovery on the loan would have been significantly enhanced.

This type of revelation is not as uncommon as you would think. Commercial lenders have routinely structured deals with borrowing bases that depend on inventory values, but with limited due diligence on what that inventory looks like in the event of a liquidation. Having a field examiner verify the quantity and age of the inventory is very different than understanding liquidation value in the event of a hiccup.


The key for any lender and appraiser is to develop a working partnership. This partnership provides the lender with honest feedback on a company and its collateral. Senior management of the appraisal firm should be able to provide insights on all loan situations no matter the size. The liquidation/auction team of the appraisal firm will work in tandem with the appraisal team to deliver real life experience –- both in valuations as well as in its counsel and advice.  Lenders should take advantage of this knowledge base on a more frequent basis. Further, the appraisal firm should be prepared to partner with the lender if something goes wrong and a liquidation or auction of collateral is required. The key is building a relationship of trust between the lender and the appraiser.

Jonathan Deptula
Director of Appraisal Services | HYPERAMS
Jonathan Deptula is responsible for managing the day to day operations of the appraisal practice along with business development, inventory appraisals and supporting all other HYPERAMS business operations. He works with asset-based lenders, commercial lenders, private equity firms and companies to help understand asset values. Jonathan has completed hundreds of appraisals for firms in the US, Canada, United Kingdom, Netherlands, Belgium and Germany.

Deptula began in the appraisal industry working for the Great American Group as a financial analyst working in the wholesale/industrial inventory practice in Boston. Progressing through the ranks, Deptula eventually became a senior project manager and was in charge of the chemicals/plastics, food and packaging industry verticals and worked on many of Great American’s largest engagements. In December 2011, Deptula moved to Chicago to open Great American’s first appraisal operations office in the Midwest while managing staff in Chicago, Boston and Dallas. Before working in the appraisal industry, he was a college hockey coach at Wentworth Institute of Technology.

Deptula is a committee member of the Midwest chapter of the Commercial Finance Association (CFA) along with being a member of the Turnaround Management Association (TMA). He is a graduate of Wentworth Institute of Technology.
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