Hilco have seen an abundance of energy and mining transactions over the last 12 months including special situations, Asset Based Lending, utilising commodities as the prominent collateral for the loan. Commodities as collateral is a risky proposition due to the unpredictable nature of spot prices over the short to medium term. Many commodities in Australia have achieved record highs in the post pandemic economy, these high commodity prices are in turn supporting larger loans. Once established these loans however can be subject to rapid pull back on collateral support, such as the case for iron ore, challenging loan covenants quickly.
In a recent assignment the impact of iron ore spot price movements and raw material to finished goods conversion calculations significantly affected appraisals and the underlying value of collateral available in the borrowing base. In this environment having the most up to date data and deep understanding of the business and collateral provides higher confidence to the prospective lender. At Hilco APAC we are fortunate to have locally-based colleagues and a depth of Global experience in mining that can advise on the creative pathways the lenders and borrowers can explore to get the right solutions.
As always, discipline is key, and a deep understanding through due diligence of the company and the borrowing base can assist lenders in navigating complexities and can provide downside protection. Greg Hardiman explains that “there is no substitute for on the ground diligence solutions that underpin credit decisions and investment committee outcomes – this provides a reliable basis for structuring loans and other transactions”. At Hilco diligence includes field work, appraisals, inventory monitoring, verification and reviewing of the borrowing base submissions, providing confidence in evolving collateral balances over the life of the loan.
The increasingly complex and competitive global business environment require Corporations and Lenders to actively assess strategies including the value of commodities on the balance sheet. Hilco’s expertise ensures Corporations and Lenders understand this value in changing economic environments.
For a confidential discussion with our team on how our Valuations team can support you in lending or borrowing transactions, contact Greg.
