Q: You have an ABL revolver worth 90M secured against 100M in AR with 85% recoverable value. If 35M is already drawn on the revolver, 10M due to venders, and 50M in cash, what is the company's liquidity?
Would the answer for this be 90-35 + 50? So the due to the venders isn’t accounted for? Also not sure what to do with the 85% recoverable value
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100
So you’re saying it’s
85-35 + 50?
55+50=105M of li(t)quidity
This is correct. Liquidity is cash + revolver availability. Cash includes drawn funds. So it’s 90-35+50 = 105
ABL Commitment = $90mm
ABL Borrowing Base = 85%*$100mm = $85mm
ABL Loan Limit = min($90mm, $85mm) = $85mm
Letters of Credit = $10mm
Liquidity = Cash + ABL Availability = $50mm + ($85 - $35mm - $10mm) = $90mm
This is the correct answer. Your borrowing base is being limited by the actual AR outstanding (e.g. credit card receivables of a brick and mortar retail company with dwindling sales), so your ABL capacity is actually only $85M. Less the $35M drawn and $10M letters of credit, you only have a $40M availability on the ABL. A company's liquidity is the revolver availability + outstanding cash.
Is there a reason why we assume the AP to be a letter of credit?
Given the context of the question, I'd assume that the $10M outstanding to vendors is a short-term promissory payment that affects liquidity. I think if you explained your reasoning in the interview, the interviewer would be more than satisfied.
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