Borrowing Base Finance

A flexible source of funding by way of collateral furnished by the Borrower according to an underlying agreement between Borrower and Funder. The amount of available facility is adjusted according to the underlying value of the eligible collateral which may be identified across various asset classes in different stages of the value chain.  The Borrower may increase the credit limit from time to time by varying the amount of the collateral furnished.

A Borrowing Base facility agreement is signed between Funder and Borrower whereby utilisations can be made provided the Borrower demonstrates an adequate cover of collateral relative to the amounts borrowed – this is known as the Borrowing Base. Security interests, also known as collateral, is granted under Security Agreement(s) by the Borrower in favour of the Funder over the assets in the Borrowing Base.

A Borrowing Base Report will be issued periodically during the term of the facility to determine the value of the Borrowing Base and thus the credit limit. The key difference between a Borrowing Base Lending and a traditional working capital asset based facility is that Funder of a Borrowing Base Lending has discretion (subject to agreed parameters) to revise commodity pricing assumptions in valuing the collateral and setting the credit limit.  A mark to market pricing scheme is generally applied to inventory assets.

The collateral pool can often include (a) security over bank accounts, (b) assignment of key contracts, (c) stock or inventory and (d) security over physical reserves in the ground. The Funder will discount, by a % of the asset being furnished or reported in the Borrowing Base Report, depending on the quality of the collateral. For example:

• Cash in a charged account may be allocated 100% due to the ease with which that collateral can be realised
• Security over receivables may be allocated a slightly less %
• Security over production inventory, or raw asset in ground (i.e. reserves) will be allocated at a far lower % given the difficulty to liquidate the security asset

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