Case Study of an Unlikely Contract Financing Deal

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We'd like to share with you an unlikely deal that just came together. We worked with a logistics company that provides product distributuion for a national juice company, who, in turn, is a subsidiary of an international beverage company. The logistics company was looking for $7 million dollars in warehouse racking, lift trucks, trucks and trailers and lease-hold improvements. As a logistic service company, our client provides warehousing, repacking and transportation of their customers' products to the ultimate consumer.

Who, What, Why, and How of Contract Financing

Our first concern was that this logistic service provided by our client is very much like a commodity, meaning there are dozens of companies that could provide the same type of service as our service provider. The second concern was that the juice company did not have a public debt rating; although, its parent was rated single A. By policy, the parent does not disseminate the subsidiaries' financial statements. we ultimately approved the subsidiary without the guarantee of the parent even though we had no financial statements. we were able to satisfy credit by proving that the subsidiary was essential to the parent.

Frequently Asked Questions

The logistics company had a 12 year relationship with the juice company, and the juice company had recently entered into a 15 year sublease for a 250,000 square foot warehouse, where the logistics company processed and repacked the juice company's products. The CEO of the company assured us that because of his close relationship with the juce company and its officers, he was confident he could get them to sign our addendum to his management contract. When he approached the juice company with our addendum, he was told absolutely not. He then tried to sell the juice company on the idea; because, it would allow him to acquire equipment that would make him more productive and more efficient in handling the jusice company's logistics. The close business relationship was not enough to carry the day. An email from the juice company's legal department succinctly stated, "How is the juice company going to make money by doing this?" We finally convinced the CEO of the logistics company to come up with some monetary reason for the juice company to sign - money talks! Ultimately, he offered a sharing of the additional profits that would come from the equipment provided by us under the Contract Finance Agreement. He also eliminated some of the original equipment and agreed to install solar panels on the top of the warehouse. An executive in charge of the parent company's Green Initative, had been pressing him to install the panels.

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The combination of additional profits and cooperation with a Green Initative, which saved the juice company money, was enough to convince the juice company to sign our addendum. we are currently in process of working with the logistics company to order equipment under the $7 million approval.

The lesson: investment grade end users who enter a Contract Finance Agreement are not going to do it without a cogent reason. The end users are motivated by making a lot of money or saving a lot of money, acquiring a unique or disruptive technology, or, as we learn from the juice company, completeing one of their internal goals such as adoption of green technology. The management and logistics fee for the company's service will continue to be treated as a monthly expense. The entire fee will flow into the bank's lockbox where the Contract Finance portion will be carved off and the balance of the mangement and logistics fee is forwarded to the logistics company.

The invaluable insight gained from this example is that it is important for the service providers to know the end users' internal and external drivers.

Don't forget, we can approve a subsidiary of an investment grade credit "without" the guarantee of the parent - if it is determined that the sudsidiary is essentional to the parent's business strategy.

Information provided by ACC.

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