What are the common terms in a Warehouse Facility?

Understanding a Warehouse Facility Term Sheet

A warehouse facility term sheet outlines the key terms and conditions for a proposed warehouse line of credit to finance receivables. As a borrower considering this type of financing, it’s important to understand each term in depth to evaluate if the proposed facility aligns with your business needs and risk tolerance.

In this comprehensive guide, we will break down the purpose and mechanics of a warehouse facility, analyze the key terms in a sample term sheet, and provide guidance on how a borrower should evaluate the pros and cons of each provision.

Overview of a Warehouse Facility

A warehouse facility provides revolving credit financing to fund portfolios of receivables. The facility is secured by and repaid from the cash flows of the receivables. Key features include:

• Revolving Line of Credit: The lender provides an initial commitment amount, and the borrower can draw down, repay and re-borrow up to the available borrowing base over the life of the facility. This provides flexibility to fund new receivable originations.
• Advance Rates: The borrowing base is calculated as the advance rate multiplied by the balance of “eligible” receivables that meet the lender’s criteria. Advance rates are usually in the 70-90% range.
• Secured Lending: The receivables portfolio is pledged as collateral, allowing lenders to advance at higher leverage than unsecured facilities. Receivables must be sold into a bankruptcy-remote special purpose entity to provide insulation from the originator’s credit risk.
• Shorter Maturity: The revolving period usually lasts 1-3 years. New receivable originations allow the portfolio to self-liquidate as receivables repay over their lifetimes.

Warehouse Facility Term Sheet Walkthrough

With the warehouse facility basics covered, let’s walk through the key terms and provisions using a sample term sheet:

Facility Overview

1. Proposed Transaction: Outlines that this will be a ${50-100mm} senior secured revolving credit facility backed by eligible charge card receivables originated by {platform} and sold to a bankruptcy-remote special purpose vehicle (SPV) borrower.

This establishes the basic framework and size of the proposed warehouse facility. As the borrower, it’s important to assess if the initial and expanded commitment amounts fit your origination plans and working capital needs. You’ll also want to review if the proposed eligible collateral matches the core receivables you originate.

Transaction Parties

2. Parent: {platform}, the corporate parent entity that originates the receivables
3. Servicer: {platform}, or another servicer approved by the Agent, who will be responsible for managing and collecting the receivables
4. Originator: Also {platform}, though sometimes originators and servicers are separate entities
5. Borrower: A bankruptcy-remote SPE subsidiary of the Parent that will purchase the receivables and borrow from the lenders to finance this purchase

The roles of Parent, Originator, Servicer and Borrower are structurally important, especially the bankruptcy-remote nature of the Borrower SPE. The separate corporate entities and restricted purpose of the Borrower isolate the receivables collateral from the general credit risks of the broader corporate group.

As the borrower, you need to be prepared to establish this type of SPE structure. The required separateness covenants limit the Borrower’s activities and require at least one Independent Director on its Board to protect lenders.

6. Agent: {lender name}, who will serve as the administrative and collateral agent on behalf of the lenders
7. Lenders: Initially {lender}, but the Agent has the right to syndicate the facility to other lenders

In a sole lender facility, the Agent and Lender roles are combined. With a syndicated facility, the Agent centralizes borrowing requests, distributes payments, and manages the lending group. This provides flexibility to increase funding capacity as the portfolio grows.

8. Back-up Servicer: A third party servicer approved by the Agent who would take over receivable management if the primary servicer fails or defaults on its obligations
9. Bank: {lender}, where the Borrower’s collection and other accounts will be established for benefit of the Agent

The Agent and Lender group should provide depth of experience with warehouse facilities, rigorous underwriting standards, and ongoing portfolio monitoring capabilities. The back-up servicing arrangement provides coverage should issues arise with the primary servicer.

Relevant Dates

10. Closing Date: Expected on October 31, 2022
11. Revolving Period Termination Date: The earliest of (i) 2 years from Closing (ii) an Event of Default or (iii) an Early Wind-Down Event. There is also Lender discretion to extend.
12. Maturity Date: The earlier of (i) 30 months after closing (ii) 6 months after the Revolving Period ends or (iii) any date after an Event of Default causing loan acceleration
13. Non-Call Period: The Borrower cannot prepay the facility voluntarily (aside from mandatory prepayments due to borrowing base deficiencies) during the first 12 months.

The tenors define the active and amortization phases of the facility:

• Revolving Period: When new receivable originations can be sold into the facility with loan advances funding the purchase price
• Non-Call Period: Limits voluntary prepayment, protecting lender return for an initial period
• Maturity Date: All amounts due and facility terminates, either at scheduled maturity or early due to default

These dates provide a sense for the expected duration of the facility and when portfolio liquidation could be required. The potential for Early Wind-Down introduces some uncertainty into the actual Revolving Period length.

14. Collection Period: Monthly calendar periods used for reporting and settlement. Begins on the Closing Date through month-end, and then follows month end dates.
15. Settlement Date: 15th calendar day each month. When distribution of funds and borrowing base adjustments occur.
16. Interest Period: Matches Collection Period, used for interest calculations

The Collection Period, Settlement Dates and Interest Periods establish the monthly cycles and payment dates that will drive account activity, reporting requirements, and interest calculations throughout the facility term.

Economic Terms

17. Advance Rate: 85% on the eligible collateral. This determines the maximum size of the borrowing base.
18. No Structuring Fee: Saves cost, but Lenders may charge this type of upfront fee for structuring complex facilities

Economically evaluating an advance rate comes down to assessing the implied “haircut” on your eligible receivables pledged as collateral, and amount of equity cushion it provides. An 85% rate means 15% overcollateralization on the outstanding borrowings.

Higher advance rates allow more leverage, but reduce the equity cushion protecting lenders. The tradeoff is balancing the economics and risks for each party. Maximum rates often range 80-90%.

19. Interest Rate: Benchmark Rate + Spread +/- Default Margin. Assessed on the outstanding borrowings, calculated daily.
20. Spread: 2.95% per annum
21. Benchmark Rate: 1-month SOFR, with provisions to shift to an alternative reference rate if needed
22. Benchmark Floor: 0.00%, protects against negative rate environments
23. Default Margin: Additional 2.0% per annum assessed after an Event of Default

Similar to any credit facility, you’ll want to analyze the total cost of funds using the Interest Rate formula compared to alternative financing options and the expected yield on new originations. The non-call period prevents refinancing solely due to rate fluctuations.

SOFR has emerged as the replacement for LIBOR in many credit agreements. Facilities documentation will outline the transition process if this benchmark rate shifts in the future.

24. Advance Rate: 85.0%
25. No Unused Fee: Unused fees, on the undrawn available amount, are common but waived in this term sheet.

There are a few ancillary fees that should be evaluated:

26. Agent Fee: Modest at ${1,500} per month to cover administrative costs
27. Additional Fees/Expenses: Responsibility for various third-party fees outlined (backup servicer, bank accounts), and any costs incurred by Agent/Lenders for facility amendments and waivers
28. No Reserve Account: Reserve accounts, funded from a specified % of collections to cover potential losses, add costs but weren’t required here
29. Collateral Removal Fee: 10bps on any collateral removals from the facility provides some protection to lenders
30. Minimum Revenue Requirement: An amount equal to the Spread that will be owed to Lenders annually, even if facility doesn’t remain outstanding. Helps guarantee return over Revolving Period.
31. Warrant Coverage: 0.50% warrant coverage to acquire equity in the Parent at nominal cost provides upside and alignment.

As you evaluate the fees and ancillary considerations, assess them in proportion to the scale of the facility to gauge overall cost effectiveness. The minimum revenue requirement and equity warrant are unique protections provided to the lending group.

Advances, Payments, and Mechanics

32. Advances: Allowed weekly during Revolving Period up to Availability, subject to conditions precedent and eligibility criteria
33. Advance Requests: Email requests required 2 business days prior to desired funding date including Borrowing Base Certificates and updated collateral data feeds
34. Available Amount: Borrowing Base less current outstanding advances, caps a request amount

The frequency, process and caps on funding requests provide controls around availability of borrowing capacity. As a borrower, you want to ensure the mechanics, including forms and timing requirements, operationally make sense.

Having availability tied to a floating Borrowing Base introduces variability and some uncertainty versus a static commitment amount. The borrowing request package and collateral reporting helps facilitate lender approvals.

35. Borrowing Base: Advance Rate multiplied by eligible receivables balances. Cash in the Collection Account is excluded on settlement dates when calculating for borrowing requests.
36. Adjusted Pool Balance: Gross receivables less concentration limits and ineligible balances

The Borrowing Base mechanics determine how much leverage is available against the collateral pools. Review the eligibility criteria, concentration limits and other reserve or exclusion adjustments that may restrict the borrowing capacity.

37. Conditions Precedent to Closing / Initial Funding:

Outlines requisites to complete documentation and activate the facility, including:

• Executed legal agreements, officers’ certificates
• Satisfactory due diligence and third party reports
• Legal opinion covering true sale, enforceability and security perfection matters
• Evidence of the Collection Account established at {lender}

As a universal concept, any Conditions Precedent should be reviewed to identify key dependencies, long lead items, and critical path milestones essential to launch the financing arrangements.

38. Available Funds: Outlines the waterfall sources aggregated for settlement date distributions in order of priority:

I. Collections from receivables II. Repurchase payments III. Hedge proceeds IV. Other proceeds and fees V. Reserve account balances

This section addresses all the cash sources relied upon to service interest, pay down principal, and fund reserves. The ordering sequence outlines the relative priorities, which becomes crucial if shortfalls ever occur.

39. Priority of Payments: Waterfall for allocation of Available Funds on settlement dates:

I. Agent and Lender fees II. Servicer and Backup Servicer fees
III. Accrued Interest IV. Cure Borrowing Base deficiencies V. Post-maturity: repay principal until repaid in full VI. Fund Required Reserves (if applicable) VII. Remainder to Borrower

Analyzing the detailed payment priorities provides critical understanding of the cash flow mechanics underlying the facility. Step I ensures Agent and Lender costs are covered first.

As a borrower, your residual claim on funds arrives last in the sequence. You want to review historical receivable payment rates and concentration limits to gauge the likelihood of material shortfalls along the waterfall.

This distribution approach isolates performance variability in the collateral from interfering with regular facility interest and principal amortization obligations. The non-call period also prevents any voluntary acceleration of principal repayment.

Collateral Terms

40. Receivable: An obligation owed by an Account Debtor to the Originator, serviced in the ordinary course of business
41. Receivable Balance: Remaining principal amount owed by an Account Debtor
42. Eligibility Criteria: Extensive criteria outlined that Receivables must satisfy to qualify as Eligible Collateral, including:

• Originated under approved guidelines
• US Dollar obligations
• Maximum term and frequency standards
• Account Debtor profile requirements like minimum income, payment history, etc
• Concentration limits on certain higher risk segments
• Loan size caps

Assessing eligibility criteria involves balancing drawbacks against incremental borrowing base availability. Stricter standards reduce pool size but should improve average credit quality.

Higher concentrations in historically better performing segments may provide acceptable risk-adjusted incremental leverage. Definitive docs will detail any discretionary Agent approval rights over adjustments.

43. Account Debtor: The individual obligated to make payments on the receivable – essentially the borrower customer
44. Platform Restrictions: Certain social media platforms highlighted as “Eligible”. Others likely prohibited.

Given warehouse facilities rely upon granular pools of consumer/small business loans or merchant cash advance receivables, the underlying Account Debtor attributes and behavior becoming integral eligibility considerations. Their history, qualifications, and activity on key online platforms all factor into credit determinations and loss expectations which drive allowable leverage.

46. Delinquent Receivables: Receivables more than 30 days contractually past due. This definition triggers performance triggers and ineligibility.
47. Modified Receivables: Receivables with amended terms, including receivership plans, lose Eligible status due to heightened risk profile

Isolating contracts not performing to original terms provides clarity on the distressed segments of the portfolio. Since modified accounts reflect prior delinquencies, their requalification requirements should be reviewed closely as well.

48. Bankruptcy Receivable: Self-explanatory event of default that requires special operations handling
49. Charged-Off Receivable: Defined as 60+ days delinquent. Effectively de-recognized from asset balances and availability.

Tracking receivables throughout the various delinquency states provides the backbone for Agency reporting that monitors portfolio health overtime. Higher risk segments see tight eligibility restrictions or exclusions to limit their impacts on the borrowing base capacity.

50. Concentration Limits: Additional portfolio constraints outlined, including:

• Caps by platform (i.e. 40% for Tik Tok)
• Individual Account Debtor limits (i.e. 5% for largest single obligor)
• Other higher risk segments like large dollar contracts

Concentration limits protect against single points of failure and industry best practices guide not having over-exposure to certain more volatile collateral subsets.

Constraints incrementally tighten as part of Early Wind Down triggers before an Event of Default is reached, so you’ll want to analyze this escalation sequence as well.

51. Collateral: Blanket lien granted to Agent on receivables portfolio, collection accounts, and other assets/equity interests of Borrower
52. Collection Account: Designated account established at {bank} to receive servicer deposits of gross customer collections, subject to an account control agreement. This locks down rights to the cash.
53. Principal Collections: Portions of receivable payments deemed attributable to principal reduction
54. Interest Collections: Residual amounts not allocated to principal reductions

The collateral package is meant to capture the wholesale assets, accounts and cash flows originated by the business. Defining the differing collection streams provides the foundation behind the waterfall mechanics covered earlier.

Borrower Reporting

55. Collateral Feed: Receivable file uploads required to Agent and Analytics Provider with each borrowing request
56. Settlement Reporting: Variety of reports required monthly including settlement calculations, certificates, borrowing base updates and prepayment summaries prior to cash movements
57. Borrowing Base Certificate: Primary collateral report with eligibility detail supporting borrowing availability
58. Financial Statements: Unaudited annual/quarterly reports of Borrower, and consolidated audited financials for Parent/Servicer
59. Compliance Certificate: Certification of financial covenant calculations

Robust reporting package allows the Agent to closely track pool developments, financial health of affiliated entities, and covenant compliance status.

Third parties like Analytics Providers may augment internal reviews. As a borrower the breadth of reporting should be evaluated to ensure data availability, systems integration needs, and adequacy of staffing.

Additional Covenants and Terms

60. Affirmative Covenants: Requirements to comply with financial covenants and provide reporting, similar to a cash flow corporate facility. Restricts activities.
61. Negative Covenants: Limitations on certain actions without consent, such as restrictions on liens, debt, mergers. Intended to protect lenders.
62. Financial Covenants: Main leverage and liquidity coverage ratios tested, with calculations tailored for a balance sheet with significant receivables collateral

Typical lending covenants aim to govern overall corporate behaviors and risks during life of facility, establishing performance, reporting and operational expectations and prohibitions. Breaching covenant thresholds often allows lenders to cancel commitments or accelerate repayments ahead of maturity.

63. Right of First Refusal: Gives {lender} right to match financing offers received over the Revolving Period, protects their position
64. Standard Indemnity: Requires borrower cover liabilities incurred in the structuring and execution of the facility