With a potential federal government shutdown just days away (or weeks away if a short-term continuing resolution were to get passed as a stop-gap measure), have you considered the impact that a shutdown may have on your asset-based lending (ABL) lines of credit?
Any lender utilizing an ABL structure to make a revolving loan available to its government contractor customers heavily relies on the accounts receivable of the government contractor to support borrowings under the line of credit. In that regard, it is important for those lenders to understand and re-evaluate the impact that a federal government shutdown will have, not only on the financial wherewithal and credit worthiness of the customers and account debtors of its borrower, but also the ability of the borrower to provide the necessary collateral support to meet its working capital needs. A federal government shutdown can readily impact established criteria of an account receivable to be included within any borrowing base calculation, including the timing of the payment of the invoice, whether continuing work will become “at risk”, and other similar criteria that could quickly turn “eligible receivables” into “ineligible receivables”. Additionally, if a lender and borrower are relying on pending bids, pending allocations of funds or other similar future events with respect to its contracts, those may be delayed, and may adversely impact the financial ability of a borrower to obtain (or repay) borrowings. Invoices may fall past due, the availability of funds needed by federal agencies or any prime contractor to pay invoices may get delayed, and ultimately the valuation of the borrowing base may be negatively impacted, causing the borrower to be over-advanced on its line of credit or face a borrowing base deficiency, and thus causing the lender to become concerned about the viability of its line of credit getting repaid.
The fact of the matter is that the potential adverse impacts of a federal government shutdown can have far reaching consequences for any government contractor. Given the foregoing, now is likely the best time to initiate a dialogue between lender and borrower regarding the potential impact that a federal government shutdown may have upon the borrower’s ability to draw upon its line of credit and to maintain sufficient working capital to continue its operations. Such discussions may include (i) revisiting eligibility criteria under a borrowing base, (ii) establishing a borrowing base reserve to minimize the lender’s risk during such uncertain times and/or (iii) modifying financial covenants, in each case before significant business disruption occurs. Also worthwhile at this point would be for both lender and borrower to consult with experienced legal and financial advisors to assess and mitigate the risk that a lender may encounter of being under-secured or that a borrower will likely encounter from a disruption to its cash flow.
Note: This publication is distributed with the understanding that the author, publisher and distributor of this publication and/or any linked publication are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.