This document discusses leveraged buyouts (LBOs) and how high-ratio asset-based loans can help finance them. It outlines the appeal of LBOs, including high potential returns from nominal equity investments. Finding an LBO opportunity and financing it is difficult. Typically financing includes an operating line of credit, term facility, and subordinated debt. A high-ratio asset-based loan can bridge the gap between the term lender and subordinated debt by providing a higher lending ratio against assets. This helps equity investors complete transactions without expensive venture capital. The document contrasts high-ratio asset-based lending with conventional asset-based cash flow lending.

1. NEWS
Wilson also promised several dishes for
future sampling:
 A corporate income tax discussion paper
(to consider the idea of fewer tax incentives
and lower tax rates).
 A corporate loss transfer system discus-
sion paper for related companies.
 A review of the unemployment insurance
program.
The Wilson diet is a strong prescription
for the deficit that will grow even stronger
over the next five years. One of this bud-
get's most innovative proposals is to sche-
dule future budgets between mid-January
and mid-February (a regular annual check-
up, so to speak). The advantages of this are
so obvious — providing greater certainty
for planning and decision making by gov-
ernments and the private sector (with less
gamesmanship by the incumbent govern-
ment) — that one wonders why it hasn't
been done before.
Lower income tax bracket indexing and
higher taxes on alcohol, tobacco and sales
mean that taxpayers earning less than
$40,000 a year will pay $350 to $500 more
in taxes by 1986. Those earning more than
$40,000 will pay a temporary surtax of 5%,
while taxpayers earning more than $60,000
will pay 10% for an 18-month period, start-
ing July 1, 1985.
A temporary surtax of 5% on 60000
large corporations will also begin July 1,
1985 and continue for one year (some
205,000 small business corporations re-main
exempt). Starting January 1, 1986, a
temporary capital tax on larger financial
institutions falls into place for two years.
This tax will be equal to an annual rate of
1% of capital employed in Canada in excess
of a $200 million threshold.
For many Canadians, the budget may
seem to be upside down. They would say
the current unemployment rate calls for
even greater government spending — not
less. According to them, high interest and
unemployment rates can be attributed to
greedy, shortsighted capitalists. For oth-
ers, this is the first decent budget in liv-
ing memory. Entrepreneurial capitalists
should be particularly pleased, since the
financial minister obviously had them in
mind when he said his budget "challenges
Canadians by rewarding success, not
subsi-dizing effort!'
Although the cocktail party was typi-
cally superficial, and the appetizer was
merely intriguing, I think Wilson's main
course will offer the Canadian economy a
badly needed dose of vitamins.
JAMES D. VASOFF, PENG, MBA, MA
WALWYN STODGELL COCHRAN MURRAY
TORONTO, ONTARIO
Ottawa report
Tax advisory
council announced
Minister of National Revenue Perrin Beatty
recently announced the formation of an
advisory council on tax administration.
William Lawlor, CA, a well-known tax
practitioner with Ernst & Whinney, ha!, been
appointed vice chairman along with Deputy
Minister Harry Rogers.
The council's 21 members, tax practi-
tioners and other individuals experienced in
small business, civil liberties, consume:. issues,
academic research and income tax practice, are
to advise the minister on the private sector's
needs and expectations as well as offer
guidance on issues such as the underground
economy and the simplifica-tion of tax forms,
guides and bulletins. The minister said he
expected members would meet approximately
twice a year, partici-pating on a voluntary basis.
Chartered accountants serving on the
committee are Serge Chevalier of Ray-mond,
Chabot, Martin, Pare & Associes, Montreal;
Robert J. Dart of Price Water-house, Toronto;
James M. Gilchrist, taxa-tion director of Suncor
Inc., Toronto; Lee H. Hergott, of Hergott
Duval, Stack and Partners, Saskatoon; and
Dennis Zinger of Montgomery, Zinger, Martin
in Elora. Ontario.
in print
Milton H. Barbarosh and T.W.
Marlow, The Acquisition Decision.
Hamilton, Ontario: The Society of
Management Accountants of Canada
(in conjunction with the National
Association of Accountants,
Montvale, N.J.), P.O. Box 176, MPO L8N
3C3. 102 pp. $15.
Conducted by a Woods Gordon research
team, this report presents the findings of a
Canada/US corporate acquisitions study of
company executives involved in success-ful
acquisitions. The report examines how
management accounting systems can be
made to conform with the actual decision
processes and managerial requirements for
accounting information, and includes a
chapter on the various stages of an acquisi-
tion — covering everything from the search
for a candidate to hostile takeovers and un-
solicited offers. A bibliography is included.
F = . . . L E P A G E ■
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20 CAMAGAZINE

2. Juts,liulltet 1985
Depart ments/Rubriques
Editorial 3
Stanactrabearer supreme
Editorial 4
Le Porte-drapeau par excellence
Letters 5
News 6
People: Standcarcts. General:
Economic outlook: Ottawa report. In
print
Research 54
What's going on Edited by
Douglas Thomas. FCA
Recherche 56
Foisons le point. Redacteur. P,
Douglas Thomas. EC:A
Verification 59
L'intearalite. une assertion diffiCile o
verifier. Reclacteur: Donald J.
Cockburn, F_C_A.
Auditing 61
Tackling the completeness
assertion. Edited by Donald J_
Cockburn. FCA.
Taxation 64
Canodo-US lax treaty a drain on
resources. By J. Michael Lavery.
CA. and Peter Rudin. MBA. CA_
Fiscalite 66
Lo convention fiscale Cohoda.ttats-
Unis et les ressources. Par J.
Michael Lavery.
C.A., et Peter Rudin, MBA, C.A.
In practice 70
Draft for a brave new world. By
Keith S. Vance. CA
Education 73
Are there predictors of success on
the UFE? By Eldon Ferguson. FCA,
and Tom McCalden. MBA. CA.
Formation des etudiants 78
L'E.E.U.: existerait-il des indicdleurs de
chances de succes-) Por Eldon
Ferguson. F.C.A., et Tom
McCalden. MBA, C.A.
Classified 84
Professional directory 87
HIGH-RATIO ASSET-BASED FINANCING IN
LEVERAGED BUYOUTS
Smart buyers have been using leveraged buyouts for decodes. but a
high-ratio asset-based loon makes financing one a whole lot easier.
Milton H. Barbarosh, MBA, MCABV, CA, and Victor Tong, MBA, CGA
2 4
INTEREST RATE SWAPS:
MATCHES ARRANGED FOR MUTUAL GAIN
An important new tool for managing interest rate risks in today's
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costs, leverage borrowing advantages or lock in desired rates.
Gilbert M. Fick, MBA, CA, and Grant E. Sardachuk, MBA
36
NEW ACT PROPOSED TO RESTRUCTURE FIRA
The Progressive Conservative government's desire to attract foreign investment
to Canada represents a major departure from the previous
Liberal government's position.
Douglas C. New, LLB, and Richard C. Rohde, RIA, CGA, CA
42
POPULAR APPROACHES TO ACCOUNTING FOR
PENSION COSTS AND LIABILITIES
in a recent survey, Canadian corporate officers, public accountants
and academics stated their preferences.
Daniel McMahon, CA
4 6
Le Supplement fiancais est insere entre les pages 44 et 45 de tous les exemploires de CA
magazine distribues oux abonnes du Quebec et oux outres obonnes du Supplement trancais.
FINANCEMENT SPECULATIF ETNANTISSEMENT DESACTIFS
Des acheteurs ostucieux miseni sur ieffel de levier depuis plusieurs decennies.
mais les prets sur nantissement des actifs focilitent de beoucoup le finoncement.
Milton H. Barbarosh, MBA, MCABV, C.A., et Victor Tong, MBA, CGA
30
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Managers financier

3. HIGH-RATIO ASSET-BASED
FINANCING
IN LEVERAGED BUYOUTS
THE CONCEPT OF LEVERAGED BUY-Outs
— of using a high degree of lever-age to
purchase the assets or shares of a business
whose forecasted cash flows ap-pear to be
enough to pay off the corres-ponding
acquisition debt — has been around since the
rurn of the-century.
Although it was widely regarded in the
early 1900s as an unethical way of doing
business, smart buyers have been using
leverage for decades. Nevertheless, it re-
mained a relatively low-profile activity un-til
the entry in the 1960s of brokerage firms,
investment bankers and entrepreneurs all
seeking to capitalize on leveraged buy-out
transactions because of the high yield that can
be realized from a nominal equity investment.
Despite the promise they hold of high
yields, leveraged buyout opportunities are
difficult both to find and to finance. Al-
though there are no sure-fire recipes for
chancing on such an opportunity, there is a
financial vehicle — the high-ratio asset-
based loan — that may make financing one a
lot easier. That type of loan will be the main
focus of this article, but before we go on to
explain in detail how it works, let's examine
some of the qualities that make LBOs so
attractive and that account for their
popularity.
As will be discussed later in this article,
conventional lending is made either on an asset
or cash flow basis. The high-ratio asset-based
loan referred to here is not a conventional asset-
based loan, but an approach to an old concept
that results in the ability to highly lever assets.
PROVIDING A
FULCRUM TO
EASE THE
BUYER'S
DEBT LOAD
The allure of the LBO
Today, leveraged buyouts (LB Os) have be-come
commonplace for a number of rea-sons:
 Conventional banking institutions now accept
this transaction method, partly out of the need to
show new assets on their balance sheets.
 Lenders can request higher fees and inter-est
spreads to offset the increased risk.
 The recessionary demand for corpora-tions to
rationalize their business opera-tions has resulted
in strategic divestitures: subsidiaries and divisions
may be offered to management or others — often
at book value.
 The financial community has entered the field by
selling financial advisory services to clients and
seeking venture capital invest-ments for their own
account.
What makes LBOs so attractive? A sin-gle
example will easily illustrate why. In January 1982
the Wesrav Corporation ac-quired Gibson Greeting
Cards from RCA. Wesray was formed in 1981 by
Raymond Chambers and William E. Simon, Gibson's
formertreasurer.
The total purchase price was $81 mil-lion.
Wesrav put up only $1 million; the rest was raised
through bank borrowings and real estate
leasebacks. Sixteen months after the transaction,
Gibson went public.
The 50% interest held by Simon anc Chambers
had a market value of £140 rni]-lion. Since then,
Wesray has acquired dozen businesses with
revenue of more thz:-. $1.5 billion.
With debt to equity ratios as high as K.. to one,
the potential for such significant returns on LBO
investments has encour-aged many financial groups
to establish LBO funds.
Finding the recipe
There are three essential ingredients in any
successful leveraged buyout:
I. Established management capable ocoper-ating
the company successfully.
2.Sufficient cash flow to pay off the acqui-sition
debt and to support capital and oper-ating cash-
flow requirements.
1.Sufficient fixed assets to provide for bank liens
against assets.
Finding the leveraged buyout opportu-nity, as
we've said, is hard enough; financ-ing the
transaction is harder still. The typi-cal LBO
financial structure is built with these basics:
 An operating line of credit, which is usu-ally
secured with accounts receivable and inventory.
Normally, it provides sufficient operating cash flows
to ensure that operat-ing cycle fluctuations in
working capital are fully financed.
 A term facility (representing approxi-mately
50%-60% of the purchase price), secured by
operating cash flows and spe-cific assets.
 Subordinated debt (unsecured), which usually
represents 25%-30% of the pur-
24 CAMAGAZINE

4. Milton H. Barbarosh,
MBA, MCABV, CA,
is manager. mergers and
acquisitions, for the Royal Bank of
Canada in Toronto and a lecturer in
York University's MBA program.
chase price. Because subordinated debt
holders are secondary in all respects to the
operating line of credit and the term
lenders, some form of sweetener is usually
offered to them — such as a provision to
convert some of their debt into equtly
(should the company either be sold or go
public at a future date). To accomplish this,
subordinated lenders may take convertible
debt or a special equity share.
Term lenders and subordinated debt
holders usually require certain covenants
to be included in their debt agreements
before any funds are forwarded. Examples
of such covenants may include these
requirements: that no dividends go out to
equity share-holders before a sufficient
down payment on the debt occurs; that no
significant pur-chase, or sale of assets,
take place without the approval of these
debtors; and that suffi-cient security (in
the form of hard assets) be offered to
protect these lenders — in panic-ular, the
term lender. The term lender nor-mally
expects fixed asset coverage of ap-
proximately 75% on real estate and 90%
on the liquidation value of equipment,
although a shortfall may be allowed in
some cases.
 Equity, which often represents l0%-2070
of the transaction price, is totally at risk and
has no security whatsoever. Besides purring
up the initial capital, equity holders are
expected to have additional funds in case
things don't work out exactly as planned and
more cash is needed to tide the com-pany
over its business cycle.
Variations on this structure can be nu-
merous, but those are the main components
involved in most transactions.
Victor Tong,
MBA, CGA,
is manager, merger and
acquisition advisory services, for
the Bank of Montreal in Toronto.
The role of high-ratio
asset-based financing
One of the most difficult problems in a
leveraged buyout is to find a source for the
subordinated (or "mezzanine") debt. Since
this type of debt is not secured by any
assets, it can be expensive in relation to
term debt. Thus, entrepreneurial investors
or venture capitalists are often looked to as
sources for providing this portion of the
financing package.
A high-ratio asset-based loan can help
bridge the gap between the term lender
(often referred io as conventional debt or
long-term debt) and the subordinated debt
holder. By providing a higher lending ratio
against assets, it can help equity investors
complete the transaction without using ex-
pensive venture capital or other funds to fill
the mezzanine debt role.
Although it is just one of the parts that
can be required in a leveraged buyout, a
high-ratio asset-based loan can provide the
critical piece to the LBO financing puzzle.
But how does a high-ratio asset-based loan
fit into the overall structure?
High-ratio asset-based vs.
conventional lending
Let's start by examining the differences
between a high-ratio asset-based approach
and the conventional or asset-based cash
flow approach to LBO financing.
In Canada, Schedule A chartered banks
have been asset-based lenders. This ap-
proach to lending involves securing loans
directly to some conservative percentage of
the collateral value of the borrower's assets.
Asa practical matter, however, a lender looks
first to cash flow to provide for or-derly
repayment, and second to the assets as an
ultimate source of repayment.
In cash flow financing, the lender seeks
protection in the borrower's small equity
cushion and cash flow. The lender, there-
fore, ties the loan to a conservative multiple
of the borrower's expected cash flow. This
has traditionally been the approach fol-
lowed by US banks. With the entry into
Canada of foreign banks, this form of lend-
ing has become more common here.
JULY 1985 25

5. High-ratio asset-based lenders may as--
sess credit worthiness by traditional means,
but they also maintain an additional per-
spective: rather than relying on a large eq-
uity cushion, high-ratio asset-based loans are
tied to virtually the full marketable col-lateral
value of the borrower's assets. These lenders
monitor their loans by watching the cash
flow.
For the prospective buyer, this basic dif-
ference in lending philosophy means more
funds are available with the high-ratio as-set-
based approach. With this type of loan, the
buyer's cash contribution will usually
represent only a small portion of the pur-
chase price. While conventional financing
would require a debt-to-equity ratio not much
higher than 1:1, with high-ratio asset-based
financing these ratios can go from 4:1 to 10:1
or even higher.
The borrower can realize additional
benefits from a high-ratio asset-based fi-
nancing package: as accounts receivable
and inventories increase, so does .the
amount of credit available. In effect, the
buyer gains access to a revolving line of
credit based on the liquid value of current
assets.
On the other hand, .high-ratio asset-based
loans generally cost more than con-
ventional financing — though not as much
as typical subordinated sources like venture
capital. Because the lender takes a secur-ity
interest in the acquired company's a(-sets,
the costs of continuously monitoring those
assets are also incurred. These in-chide
sales volume, inventory level and cash
collections — all of which 'fluctuate on a
day-to-day basis. For this reason, high-
ratio asset-based financing is usually priced
at one to three percentage points higher
than a conventional lending package. De-
spite the added cost, it can often be the
cheapest means of buying a company, and
the higher leverage provided by this ar-
rangement usually still delivers a better re-
turn on the investor's equity than conven-
tional financing.
The balance sheet shown in Exhibit 1
illustrates this point. Let's assume that a
conventional lender requires a leverage fac-
tor of no more than 1:1, and that a high-
ratio asset-based lender might permit a 9:1
factor. A company with S10 million in as-
sets would need S5 million in equity to
meet the ratio demanded by the conven-
tional lender; an asset-based lender could
finance the same company with only $1
million in equity.
The comparative income statement is
even more interesting. It indicates that the
return on equity (ROE) strongly favours the
high-ratio asset-based approach, even
though the interest rate is three percent-age
points higher. If the earnings before in-
terest and taxes (EBIT) for this company are
10% on sales of S25 million, the ROE in the
high-ratio asset-based scenario would be
73%, but only 22% if financed convention-
ally.
Canadian and US lending
philosophies
There are significant differences in lending
philosophies and practices between the Ca-
nadian and US marketplaces. US commer-
cial banks are usually unsecured lenders.
Their main focus is on the borrower's cash
flow positions and financial strength (as
measured by equity versus assets). Secured
and high-ratio asset-based lending is usu-
ally handled by special divisions or subsid I-
aries of these banks. This "commercial fi-
nance" industry is well developed in the
United States, with most of its members
involved in high-ratio asset-based lending.
Canadian banks are mainly secured
lenders; consequently, a distinction be-
tween conventional and high-ratio asset-
based approaches is less clear from a Cana-
dian perspective, with the issues being a
tradeoff of risk and loan pricing.
Canadian factoring companies usually
market high-ratio asset-based financing in
conjunction with other factoring services.
The low demand for business loans in the
past few years has pressured Canadian
lenders to forego borrower reporting and
monitoring requirements to remain com-
petitive. For this reason, high-ratio asset-
based financing, in its pure form, is not well
developed in Canada. But with activity
growing in the LBO market, we may well
see demand increasing for this type of lend-
ing service — especially if the economy im-
proves and the demand for commercial
loans takes an upward turn.
Our discussion on the high-ratio asset-
based lending process and techniques ap-
plies to the US financing industry and to
those Canadian financial institutions offer-
ing high-ratio asset-based loans.
Lending approach
and risk evaluation
Implicity, the higher degree of financial
leverage allowed to the high-ratio asset-
based borrower means a higher degree of
solvency risk, since a highly leveraged com-
pany must maintain a consistent earning
stream to meet its fixed obligations (notably
the interest charges). In assessing a partic-
ular credit risk, a high-ratio asset-based
lender must therefore measure the stability
and predictability of the borrower's earn-
ings in addition to assessing the liquidation
value of the secured assets.
In a leveraged buyout, the risks to the
lender can be grouped into three main cate-
gories:
1. Business risk. This includes industry risk
and company risk. Industry risk is assessed
in terms of its historical performance and
outlook, and its sensitivity to the swings in
the general economy. A company's risk is
evaluated in terms of product strength,
marker share, its relation to suppliers and
customers, production and warehouse facil-
ities, distribution capabilities, and its vul-
nerability to competitive pressure.
But the most important aspect of the
business risk is management capability,
which is measured in terms of the knowl-
Exhibit 1
Asset-Based vs. Conventional Lending
Balance sheet
IS millions)
Conventional Asset-based
income statement
($000's)
Conventional Asset-based
Total assets
10.0 10.0
Soles 25,000 25,000
Internally
generated
liabilities 2.5 2.5 EBIT g 10% 2,500 2.500
Interest on
Borrowings 2.5 6.5 borrowings @ 13% 325
0.16%
1.040
Total liabilities 5.0 9.0 Pretax profits 2,175 1,460
After-tax
Equity 5.0 1.0 profits Ce 50% 1.088 730
Equity and Return on
liabilities 10.0 10.0 equity 22% 73%
Total leverage 1:1 9:1
26 CAMAGAZINE

6. S
•
•
•
•
edge, expertise, experience and track re-
cord of management, as well as its reputa-
tion within the industry. A reasonable and
comprehensive business plan (if one exists)
can often provide valuable insight into the
ability of the management group. It cannot
be emphasized enough just how fundamen-
tal good management is to the success of a
leveraged buyout.
2. Collateral risk. In simple terms, collateral
risk refers to the probability that the liqui-
dation value of secured assets will not be
enough to cover the outstanding balance of
the loan principal and interest. It is mea-
sured as a function of the margin (the per-
centage of loan advanced to the value of the
assets), the overall liquidity of the assets, the
degree of certainty with which the liqui-
dation value can be established, and the
ability of the lender to monitor and control
the assets.
3. Financial risk. Financial risk is the proba-
bility of insolvency leading to bankruptcy
and the liquidation of assets. The extent of a
lender's financial risk depends on two
variables: the capital structure and the bor-
rowing company's earning power.
The higher the leverage ratio (debt ver-sus
equity), the higher the financial risk will be,
because a larger portion of the earning
stream is needed to service the debt.
The feasibility of any leveraged buyout is
determined by balancing the business, ...
collateral and financial risks. in this way,
the Sender tries to reduce the overall loss
risk to as close to zero as possible. The
downside is limited by the liquidation value
of the assets, while the upside potential is
limited to the yield of the prescribed inter-
est rate. These two factors, affecting only
the lender, represent the fundamental dif-
ference between lenders and equity partici-
pants in terms of risk and reward.
Financing criteria
Here are the key factors a lender looks for
when deciding whether to finance an LBO.
Company characteristics
High-ratio asset-based lenders often
finance well-established manufacturers
with a clear-cut record of profitability. The
com-pany's maturity means that its
working cap-ital requirements are easier to
predict, and its slower growth means lower
cash require. rnenrs for capital expansion.
Manufactur-ing concerns are preferred
because they usually have stable,
straightforward ac-counts receivables and
inventories, plus substantial fixed assets
that can be used as collateral.
Of course, management capability is key.
The management team must be finan-cially
astute and psychologically able to handle a
lot of debt. Lenders look for quali-
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JULY1985
27

7. ties such as entrepreneurship, leadership
and a sense of risk taking when they exam-
Me the group's expertise and reputation.
Because management capability is para-
mount, the lender usually insists that the
owners or managers put up a substantial
portion of equity in relation to their per-
sonal net worth to ensure that the risk falls
on the new owners first.
Financial position
Along with a consistent earnings record,
the lender also looks for a clean balance
sheet with assets that would yield a
liquida-tion value equal to the purchase
price plus ongoing financing needs. These
assets should be unencumbered by pledges
to other lenders or third parties, and there
should be little or no short or long-term
debt before leveraging.
Cash flow
Cash-flow projections will be subjected to
detailed analysis by the lender, who will
usually insist that such projections be pre-
pared professionally with all the assump-
t ions clearly stated. These assumptions will
also be tested and challenged. The basic
purpose is to determine the viability of the
new acquisition, especially its ability to ab-
sorb the additional financial burden created
by such heavy financing.
Quality of assets
Their quality determines the amount of
financing the lender is willing to advance.
The rate, or margin, of advance depends on
the liquidity of the class of assets and a
number of other factors.
Accounts receivable generally has the
highest liquidity and, as such, are usually
accorded the highest margin. First and fore-
most, accounts receivable must be due from
firm sales to qualify as collateral. In other
words, no account should contain a contin-
gency regarding payment.
To determine an eligible base for mar-gin
calculations, the lender usually ex-cludes
these items as ineligible receivables:
 Consignment sales or progress billings.
 Accounts over 90 days past due.
 Intercompany sales.
Credit rejects.
Offset accounts (sales to supplier).
After deducting these ineligibles from the
gross account receivables, the margin of
advance is then applied to the net to deter-
mine the amount available for lending. The
maximum advance rate for accounts receiv-
able is usually 80%-85%.
Inventory
From a lender's viewpoint, inventors' in-
cludes only readily saleable items. Nor-
mally, the lender does not want to be in-
volved in converting inventory into sale-
able form. That's why work in progress is
usually deemed ineligible. The purchase
price of raw material and the cost of fin-
ished goods usually support a maximum
50% rate of advance. Perishable items or
those subject to high obsolescence, how-
ever, receive a much lower margin rate, if
they're given one at all.
Machinery and equipment
To determine the liquidity and advance rate
for machinery and equipment, an out-side
appraisal of the liquidation value, also
known as "quick sale" value, is required.
The advance rates vary from 70%-90% of
such value.
Prospect assessment
To assess the borrower's position (in rela-
tion to the criteria mentioned previously)
and, ultimately, to make a decision on
whether to finance the deal, the lender re-
quires — as a minimum — the following
information:
A brief description of the proposed fi-
nancing plan.
Background information on the business,
including its products, facilities, supplier
and customer bases and .organizational
structure.
An industry and market analysis.
The company's marketing plans and
strategies.
The business plan, with highlights on any
proposed changes from the current op-
erations.
The financial statements for the past five
years — preferably audited.
The cash-flow projections for the next
three to five years (which should include
the impact of the proposed financing).
A profile of the management team, with
resumes for each key member.
Most of that information would already
be available in any financing proposal pre-
pared by sophisticated borrowers. This
would be offered of their own accord (or
on advice from their lawyer or accountant)
in an effort to speed up the financing
decision process.
Exhibit 2
Review of Prospective Borrower Report Format
General information
Company history.
Description of business/products.
Principals and management, including
organizational structure and details on any
subsidiaries and associated companies.
Details on bankers. accountants and lawyers
Labours and unions.
Competition.
Markets, marketing strategies and channels.
Production facilities.
Suppliers.
Distribution channels.
Financial performance
Analysis of the five most recent financial
statements, preferably audited.
Review of the current year's business
plan. including the major assumptions.
Compare and analyze the most recent
forecast of the current year's results
against the business plan.
Soles and accounts receivables
Soles policy (trade and term discounts).
Warranties/guarantees.
Soles statisticsicredit notes.
Orders on hand.
Shipping procedure.
Credit granting procedures,
collection policies and practices.
Other major features.
Inventory (if applicable)
Analysis of year-end inventory for the past
five years by category: row material. work in
progress, finished goods.
Nature and condition of inventory.
Storage and other locations.
Length of production cycle.
Types of records maintained, inventory
control procedures.
Accounts payable
Aged listing of accounts payable.
Analysis of purchases on which
discounts were allowed but riot taken.
Analysis of purchases and payments to the five
largest suppliers.
Review payments on soles, income and
withholding loxes.
Review payments to principal shareholders.
Cash-flow analysis
Detailed analysis and review of
the cash-flow projections, including
the underlying assumptions
Ensure the impact of cosh flow is
properly reflected in the pro-forma
financial statements os wet/ as in the
inventory schedules.
Fixed assets
Review book value, oge and depreciation
schedule of fixed assets.
Identity replacement cost, if possible.
Identity any liens on fixed assets.
Insurance
Review adequacy of insurance coverage.
Conclusion and recommendations
Including the recap of the critical
assumptions and major risks, both short
and long terms.
28 CAMAGAZINE

8. On-site analysis
One of the most important steps in the
lender's decision-making process is the on-
site analysis of the prospective borrower's
financial records and operations. The pur-
pose of this exercise is twofold: to assess the
viability of the new company and to ascer-
tain the value of the assets for collateral
purposes. The emphasis _here is on future
performance, not the past record of the
business. -
For LBO financing the lender should pay
particular attention to the gross profit
percentage of the current versus previous
years as it relates to actual costs and inven-
tory build-ups. Quite often when a com-
pany is positioned for a sale, inventory re-
serves accumulated over the years are "let
out" during the year or two before its sale,
thereby creating artificial profits (in the
hope of increasing the business' sale price).
If the business being acquired is a sub-
sidiary or a division of a larger corpora-tion,
the management expense or overhead
allocation should be scrutinized; the par-ent
company's services should be ascer-tained
(such as accounting, data processing,
personnel); and the reasonableness of the
charges examined. The question of how these
services are provided after the sale —and the
related costs — should also be ad-dressed.
(Exhibit 2 is an example of a pro-forma
report high-ratio asset-based lenders use to
review prospective borrowers.)
Account monitoring
Because of the inherent risk this type of
loan carries and the high fluctuations of the
assets' collateral value (accounts receivable
and inventory), the high-ratio asset-based
lender requires a significant level of report-
ing from the borrower. This unique — and
elaborate — account monitoring process
uses the following techniques:
Daily reporting
Quite often the borrower must report sales,
collection and inventory activities on a
daily basis. In addition, evidence of ship-
ping is generally required on any invoices
over a predetermined limit. This informa-
tion is required to calculate the availability
of funds based on the agreed margin of
advance. (Exhibit 3 provides a sample re-
port that would be required from the bor-
rower on a daily basis.)
Weekly reconciliation
The balances for the loan, accounts receiv-
able and inventory are reconciled frequent-ly
(usually on a weekly basis) between the
lender's internal calculations and the bor-
rower's general ledger.
Accounts receivable confirmation
Using techniques not unlike those used in
public auditing, the lender usually con-firms
the pledged accounts receivable di-rectly
with the borrower's customers on a
"stratified sampling" basis. The frequency
of the confirmations and the size of the
samples will depend on the size of the loan
and its relative risks.
Quarterly audits or reviews
To monitor the borrower's performance, and
to ascertain that the value of collateral is
still adequate, the lender generally re-quires
audits on a quarterly basis. These audits or
reviews are usually carried out by the
lender's own specialized staff or done by
public accountants on contract. Their scope
is usually less encompassing than the initial
investigation. Nevertheless, they are
imposing from the borrower's point of view
and therefore provide an important "polic-
ing" function on the lender's behalf.
Burdens for
lenders and borrowers
The techniques just described represent the
key aspects of the high-ratio asset-based
lender's account monitoring process. There
are other procedures — such as the pre-
authorization of cheques over a specified
amount — that could apply to particular
borrowing situations, depending on the size
and the risk of the loans. Overall, they
represent a significant amount of overhead
expense to be incurred by the lender, which
partly explains why high-ratio asset-based
loans are generally one to three percentage
points higher in interest rates than conven-
tional loans.
For the borrower, these procedures rep-
resent a tremendous burden on recordkeep-
ing, staffing requirements and the manage-
ment team's time. Consequently, any buy-
ers of LBOs thinking about high-ratio asset-
based financing should be prepared, both
physically and psychologically, for the
voluminous reporting and close monitor-ing
of their business affairs by the lenders.
High-ratio asset-based loans are an effec-
tive tool for those leveraged buyouts where
the acquired business' assets are strong
enough collateral to provide financing for a
significant portion of the cash price as well
as the funding needs for medium to long-
term operations. If the buyer wants to maxi-
mize leverage, the high-ratio asset-based fi-
nancing approach can be invaluable. Inves-
tors should be prepared to pay more for the
loan than conventional debt, however, and to
have the lender constantly looking over their
shoulders. •
Exhibit 3
Doily Report from Borrower
Status of accounts receivable
1. Total receivables previously assigned
2. Add: sales from this dale (invoices attached)
3. Total gross receivables assigned
4. Deduct: (a) collections from this dote
b. deductions and credits
a. other adjustments (specify) Total
deductions (o-c)
5. Total net receivables assigned
6. Deduct: (a) ineligible receivables as of (date)
(b) other (specity)
7, Total eligible receivables
8. Maximum loan availability on receivables
Status of loans and advances
1. Beginning loan balance (line 13 of previous
report)
2. Deduct: (a) collection this
dale (line 4a) (b) adjustments
(specity)
3. Subtotal
4. Advances hereby requested
5. New loan balance
6. Availability trom receivables (line 8)
7. AIR surplus or (inventory loan) (line 14-15)
Status of inventory loan
1. Inventory loon balance (line 16, it any)
2. Lost inventory declaration (as of date)
3. % inventory financing (lines 1647)
x x x x x
x x x x x
JULY 1985 29

9. F 'ANCEMENT SPECULATIF ET
NANTISSEMENT DES ACTIFS
LE CONCEPT DL' FINANCEMENT SPE-culatif,
autrement dit de ]'utilisation de l'effet de levier
financier lors de l'achat des actifs ou des
actions d'une entreprise dont les previsions de
tresorerie semblem suffisantes pour assurer le
remboursement de la dette com ractee 5 l'achat,
existe depuis le debut du siecle.
Bien que cette facon de proceder ait ere
consideree par de nombreuses personnes, dans
les premieres annees, comme uneffa-con peu
morale de faire des affaires, des acheteurs fort
astucieux misent sur l'effet de levier depuis
plusieurs decennies. Cease activite est toutefois
demeuree relativement peu populaire jusqu'au
debut des annees 60, oil les societes de
courtage, les preneurs fermes et les speculateurs
ont commence 5 s'interesser au financement
speculatif, en raison du taux de rendement eleve
que Von peut realiser a partir d'un montant
minime de capitaux propres.
Les bonnes occasions d'acquerir une en-
treprise avec financement par emprunt spe-
culatif sont difficiles a trouver, tour comme le
financement lui-meme, et it n'y a pas de recette
qui garantisse le succes a coup stir. II existe
toutefois un mode de financement
pret sur nantissement des actifs — dont
Futilisation facilite de beaucoup les chosen. Ce
type de pret constitue l'objet principal du
present article. Avant de donner plus de
Comrne nous le verrons plus loin dans le present
article, le pret traditionnel est consenti soil sur
la garantie d'actifs, son sur la base des flux de
tresorerie. Le pret sur nantissement d'actifs dont
it est question ici n'est toutefois pas le pret
traditionnel sur la garantie d'actifs mais une
facon nouvelle d'appliquer tin ancien concept,
suivant laquelle ]'entreprise petit affecter une
part considerable de ses actifs en nantissement
de ses emprunts dans le cadre d'une operation de
financement par emprunt speculatif.
UNE NOUVELLE
FAc0N
D',A J :EGER
LE FARDEAU
DE LA DETTE
details a ce suiet, nous allons examiner les
caracteristiques du financement speculatif et les
raisons pour lesquelles cette forme de
financement est si populaire.
Comment se passent les chases?
De nos tours, le financement speculatif est
devenu chose courante pour un certain nom-bre
de raisons:
 Les institutions bancaires traditionnelles
acceptent maintenant d'accorder ce genre de
financement, notamment parce qu'elles ont
besoin de faire figurer de nouveaux actifs dans
leur bilan.
 Les preteurs peuvent exiger des frais et des
taux d'interet plus eleves afin de contre-
balancer le risque accru.
 La necessite pour les entreprises, en pe-
riode de recession, de rationalises leur ex-
ploitation a entraine des desinvestissements
strategiques: des finales et des divisions
d'entreprise sons ainsi offertes aux mem-bres
de la direction ou a des tiers, souvent la valeur
comptable.
 Les financiers ont commence a s'interes-ser
au domaine en offrant des services con-seils a
leurs clients et en cherchant des
investissements spec-ulatifs pour leur pro-pre
compte.
Qu'est-ce qui rend le financement spe-culatif
si attrayant? Un simple exemple nous aidera a
le comprendre. En janvier 1982, Wesray faisait
l'acquisition de Gibson
Greeting Cards, qui appartenait anterieu-rement
a RCA. La socitte Wesrav avait etE formee en
1981 par Raymond Chambers et William E.
Simon, Fancier) tresorier de Gibson.
Le prix d'achat total s'elevait a 81 mil-lions
de dollars. Wesray fit tin apport en capitaux
propres d'un million de dollars et le solde fut
finance au moyen d'emprunts bancaires et de
contrats de cession-bail sur des biens
immobiliers. Seize mois apres l'acquisition,
Gibson emit des actions dans le public. La
participation de 50 % detenue par Simon et
Chambers atteignit la vaieur marchande de
140 millions de dollars. De-puis lors, Wesray
a achete une douzaine d'entreprises avant des
produits d'exploita-tion superieurs 5 1,5
milliard de dollars.
La possibilite de realiser des rendements tres
importants avec des ratios d'endette-ment aussi
eleves que 10:1 a incite de nom-breux groupes
financiers a creer des fonds de financement
speculatif.
Trouver la recette
Trois elements sent essentiels pour reussir le
financement d'une acquisition par em-prunt
speculatif:
1.une equipe de direction chevronnee qui soit
en mesure de gerer ]'entreprise avec succes
2.des flux monetaires suffisants pour as-surer
le remboursement de la dette née de
]'acquisition et faire face aux besoins de
tresorerie que suscitent le maintien du capi-tal
et les activites d'exploitation
3.des immobilisations corporelles suffi-santes
pour assurer le cautionnement au-pres de la
banque.
Trouver 12 bonne occasion d'acquerir une
entreprise pouvant etre financee par
emprunt spec-ulatif n'est pas chose facile,
repetons-le, mais l'obtention du finance-
ment est encore plus ardue. La structure
30 CAMAGAZINE

10. fthanciere type de ce genre de financement
repose sur les bases suivantes:
 line marge de credit servant a ]'exploi-
tation, generalement garantie par ies comp-
les clients et les stocks. Cette marge doit
normalemem permettre d'avoir une treso-
retie suffisante pour que les fluctuations du
cycle d'exploitation qui se repercutent sur le
fonds de rouiement soient totakment
financees.
 Un emprunt a terme (representant envi-ron
50 % a 60 % du prix d'achat) garanti par 4.• les
flux monetaires decoulant de i'exploita-tion et
par des elements d'actif specifiques.
 Tine dette de deuxieme rang (non ga-
rantie) representant generalement 25 % 30 %
du prix d'achat. Comme it preteur de second
rang passe apres ceux qui ont accorde la
marge de credit et le pre a terme, et ceia a
tous les points de vue, on leur offre
genEralement certaines "douceurs", par
exemple la possibilite de convertir une par-tie
de leur creance en capitaux propres (ad-
venant que l'entreprise soil vendue ou
devienne une societe ouverte, a une
date ulterieure). Ce qui peut se faire au
moyen d'une dette convertible ou d'un titre de
participation speciale.
Les preteurs a terme et les preteurs de
second rang exigent generalement certaines
clauses restrictives dans leur contrat avant
d'avancer les fonds. En vertu de ces clauses,
l'entreprise ne peut distribuer de divi-dendes
a ses actionnaires ordinaires avant d'avoir
fait un remboursement initial suffi-sant; elk
ne peut faire ni achat important, ni vente
d'actifs sans ]'approbation des pre-teurs; elle
doit enfin offrir en garantie un montant
suffisant d'actifs corporels pour proteger les
preteurs, notarnment le preteur a terme. Ce
dernier s'artend normalement une garantie
de l'ordre de 75 sur les biens
immobiliers et de 90 sur is vakin de
liquidation du materiel, meme s'il peut par-
fois accepter un peu moths.
Milton H. Barbarosh,
B.Comm., MBA,
MCABV, C.A.,
est directeur, fusions et
acquisitions, a la Banque Royale
du Canada a Toronto,. ii donne
eoolemeni des cours o la York
University dans le cadre du
programme MBA.
Victor Tong,
MBA, CGA,
est directeur, fusions et
acquisitions, a to Banque de
Montreal a Toronto.
 Des capitaux propres, representant sou-
vent 10 a 20 % du prix d'achat, qui consti-
tuent un risque absolu et ne sont garantis en
aucune facon. On attend des personnes qui
invest issent des capitaux propres non seule-
mem une mise de fonds initiaie, mais egale-
ment qu'elles possedent des fonds addition-
nels pour le can ou les chosen ne fonctionne-
raient pas exactement comme prevu et que
l'entreprise air besoin de reunir davantage de
liquidites pour traverser avec succes
mutes les etapes de son cycle d'exploitation.
Les variances de cette structure peuvent
etre nombreuses, mais ce sont la les princi-
paux Elements en cause dans la plupart des
operations.
Le nantissement des actifs
L'un des problemes les plus difficiles dans
une operation de financement speculatif est
de trouver une source de financement par
emprunt de second rang. Comme ce type
d'emprunt n'est garanti par aucun element
d'actif, ii peut coiner tres cher: les investis-
seurs interesses a speculer et les detenteurs
de capital-risque sont generalement recher-
chts pour certe part de financement.
Le pret sur nantissement des actifs peut
aider a combler le vide qui existe entre le
pret a terme (souvent appele dente tradition-
nelle cm dente a long terme) et le pret de
second rang. En permertant un ratio de
financement sur actifs plus Cleve, ce mode
de financement aide les investisseurs ac-
tionnaires a boucler la transaction, sans
qu'ils aient besoin d'utiliser des frais Cleves
du capital de risque ou d'autres fonds pour
jouer le role de dette de second rang.
Bien qu'il ne soil qu'un des elements
necessaires du financement spec-ulatif, le
pret sur nantissement des actifs constitue
souvent la piece qui permet de completer le
pl4771e. Mais comment ce type de pret
s'integre-t-ii dans la structure financiere
globale?
Prets traditionnels et prets
sur nantissement des actifs
Commencons par examiner les differences
entre le financement sur nantissement des
actifs et le financement traditionnel fondE
sur les flux monetaires dans le cadre d'un
financement speculatif.
Au Canada, les banques a charte fi-
JUILLET 1985 31

11. gurant a ]'Annexe A de la Loi sur les ban-
ques accordent des prets sur nantissement
des actifs. Cette formuie suppose que les
prets soient garantis scion un certain pour-
centage, determine avec prudence, de la
valeur de nantissement des actifs de Fern-
prunteur. Dans la pratique, toutefois, les
preteurs considerent d'abord les flux de
tresorerie en vue d'un remboursement re-
gulier, puts les actifs, comme derniere
source de remboursement.
Dans le financement fond& sur les flux
de tresorerie, le preteur recherche une pro-
tection dans la mise de fonds limitee de
l'emprunteur et les flux de tresorerie. Le
preteur, par consequent, etablit le montant du
pret en appliquant un multiple prudent aux
mouvements nets de fonds prevus. Cette
formule qui est couramment utilisee par les
banques americaines tend, depuis ]'entree des
banques etrangeres, a se repan-dre au
Canada. Les preteurs qui se basent sur les
actifs de l'entreprise peuvent evaluer la
qualite du credit selon des moyens tradi-
tionnels, mais ils y ajoutent une nouvelle
perspective: au lieu de se fonder sur un
important coussin de capitaux propres, ils
considerent la valeur de garantie negociable
des actifs de l'emprunteur. Ces preteurs
exercent une surveillance stir la tresorerie.
Pour l'acheteur potentiel, cette diffe-
rence fondamentale dans les principes qui
president au financement se traduit par la
possibilite d'obtenir un financement plus
eleve en affectant les actifs en garantie.
Dans cc type de financement, rapport en
cspeces de racheteur ne represente genera-
lement qu'une fa-able portion du prix era-
chat. Alors que le financement traditionnel
exige un ratio d'endertement qui ne soit pas
plus eleve que 1:1, le financement sur nan-
tissement des actifs permet des ratios d'en-
dettement allant de 4:1 a 10:1, voire des
ratios encore plus elevEs.
L'emprunteur pent retirer des avanta-
ges additionnels d'un financement sur
nan-tissement des actifs: raugmentation des
comptes clients et des stocks entraine une
augmentation du credit disponible. En ef-fet,
l'acheteur acquiert le droit a une marge de
credit renouvelable fond& sur la valeur
liquide des elements d'actif a court terme.
Les emprunts garantis par les actifs con-
tent cependant en general plus cher que le
financement traditionnel, tout en demeu-rant
moins &ley& qu'une derte de second rang
financee par des capitaux de risque. Comme
le preteur prend une part de garan-tie dans
les actifs de l'entreprise acquise, it doit
egalement engager des frais pour sur-veiller
ces actifs, en particulier le volume des
ventes, le niveau des stocks et le recou-
vrement des creances, qui flucruent tous de
jour en jour. Pour cette raison, le finance-
ment sur nantissement des actifs cane ge-
neralement un a trois pour cent de plus que
le financement traditionnel. Malgre les coins
additionnels, ce mode de financement
demeure souvent le moyen le moins con-
teux d'acheter une entreprise, et le ratio de
levier plus eleve que permet cc genre d'en
tente entraine generalement un meilleur
rendement des capitaux propres investis
dans l'entreprise, comparativement au fi-
nancement traditionnel.
Le bilan donne en exemple au Tableau
illustre ce point. Considerons le cas d'un
preteur qui accorde un pret de type class:-
que permettant seulement un ratio de levier
egal ou inferieur a 1:1, et celui d'un preteur
qui accorde un pret sur nantissement des
actifs permettant un ratio aussi eleve que
9:1. L'acquisition d'une entreprise avant des
actifs d'une valeur de 10 millions de dollars
necessitera une mise de fonds de cinq
millions de dollars en capitaux pro-pres,
compte tenu des exigences du premier
preteur; par contre, le second preteur pourra
financer ]'acquisition de la merne entreprise
pour une mise de fonds dun million de
dollars seulement.
La comparaison de Fetal des resultats
pour les deux types de financement se re-
vele encore plus interessame. On volt en
effet que le rendement des capitaux propres
est bien plus eleve dans le cas du finance-
ment sur nantissement des actifs, meme sl le
taux d'interet est de trois pour cent plus
eleve. En supposant que le benefice avant
impots de la societe corresponde a 10 % du
chiffre d'affaires de 25 millions de dollars,
le rendement des capitaux propres s'elevera
a 73 °Jo scion le scenario d'un financement
sur nantissement des actifs, alors qu'il ne
sera que de 22 To scion le financement de
type traditionnel.
Philosophies canadienne et
americaine en matiere de prim
Les philosophies et les pratiques en matiere
de prets different grandement scion que Pon
se sinie sur ]es marches canadiens ou
americains. Aux Etats-Unis, les banques de
commerce pretent generalement sans ga-
rantie. Ces banques s'interessent principa-
lement a la situation de tresorerie et a la sante
financiere de ]'entreprise (mesuree par le
rapport entre les capitaux propres et rac-tif).
Les prets garantis et les prets sur nan-
tissement des actifs sons generalement du
ressort de divisions specialisees ou de fi-
liales de ces banques. Ce type de finance-
ment commercial est bien developpe aux
Etats-Unis, et la plupart des membres oeu-
vrant dans le domaine s'interessent aux prets
sur nantissement des actifs.
Les banques canadiennes, quanta elles,
pretent generalement sur la base d'une ga-
rantie. La distinction entre rapproche tra-
ditionnelle et I'approche fondee sur les ac-tifs
est done mains claire selon la perspec-
tive canadienne, car on cherche ici a trouver
un compromis entre le risque et le coat du
financement.
Tableau I
Comparaison du financement de type traditionnel et du
financement sur nantissement des actifs
61Ian
(en millions tie dollars)
Finoncement
Stir
Financement nantissement
traditionnel des °Wits
Total
Etat des resultats
(en mitliers tie dollars)
Financement
SLIT
Financement nontIssernent
troditionnel des =tits
Chittre
des comptes 10,0 10,0 arc:Moires 25 000 25 000
Elements de
passit d'origine
Benefice
d'origine avant
interne 2,5 2,5 impOts 010% 2 500 2 500
Interets sur
emprunts
Emprunts 2,5 6,5 @13% 325 016% 1 040
Benefice avant
Passit total 5,0 9,0 impois 2 175 1 460
Capitaux Benefice opres
propres 5,0 1,0 impot t50% 1 086 730
Co p Ito LIX
propres et
Rendement
des capitaux
possit 10,0 10.0 propres 22% 73%
Etlet de levier
total
1:1 9:1
32 CAMAG A ZINE

12. Les entreprises d'affacrurage canadien-
nes offrent generalement du financement sur
nantissement des actifs, conjointement avec
les autres activites d'affacturage.
faible demande de prets commerciaux qui a
prevalu ces dernieres annees a pousse les
preteurs canadiens a restreindre ]curs exi-
gences en termes de rapports des emprun-
teurs et de surveillance de leurs activites
pour demeurer concurrentiels. Pour cette
raison, le financement sur nantissement des
actifs, dans sa forme pure, n'est pas tres
developpe au Canada. Cependant, avec la
croissance des activites sur le marche du
financement speculatif, on peut s'anendre
une augmentation de la demande pour
ce type de pret, surtout si la conjoncrure
s'ameliore et que la demande de prets
commerciaux prend une tendance a la
.hausse.
Notre discussion sur le principe du fi-
nancement sur nantissement des actifs et les
techniques qui en decoulent concerne
l'industrie de la finance americaine, ainsi
que les institutions financieres canadiennes
qui offrent des prets sur nantissement des
actifs.
Formale de pret et
evaluation du risque
Implicitement, le haut niveau des ratios de
levier autorises dans le cas de prets sur
nantissement des actifs signifie une impor-
tance accrue du risque d'insolvabilite, car les
entreprises a ratio d'endettement Eleve
doivent realiser des benefices irnportants de
facon continue afin de faire face a leurs
obligations fixes (notamment le paiement des
interets). Pour evaluer le risque lie a l'octroi
d'un credit particulier, dans le cadre d'un
financement sur nantissement des ac-tifs, le
preteur doit apprecier la stabilite et le
caractere previsible des benefices de I'em-
prunteur, en plus de la valeur de liquidation
des actifs constiruant la garantie.
Dans le cas d'un financement speculatif,
les risques encourus par le preteur peuvent
Etre groupes en trois grandes categories:
1. Risque lie a l'entreprise. Ce risque corn-
porte deux volets: le risque lie au secteur
d'activite dans lequel oeuvre l'entreprise et
le risque propre a l'entreprise elle-meme. Le
risque lie au secteur d'activite s'evalue
d'apres l'historique des resultats et les pers-
pectives dans le secteur ainsi que la sensi-
bilite a la conjoncrure economique. Le ris-
que propre a l'entreprise s'evalue d'apres la
force de ses produits, sa part du marche, ses
relations avec les fournisseurs et les clients,
ses moyens de production et d'en-treposage,
son reseau de distribution ainsi que sa
vulnerabilite aux pressions de la con-
currence.
Mais l'aspect le plus important du ris-
que lie a l'entreprise est la capacite de la
direction, qui s'evalue d'apres les connais-
sances, les competences, ]'experience et les
realisations passees, sans oublicr is reputa-
tion a l'interieur du secteur d'activite. Un
plan directeur raisonnable (s'il existe) per-
met souvent de se faire une idee juste de is
capacite du groupe de direction. On n'insis-
tera jamais assez sur ]'importance fonda-
mentale d'une bonne gestion pour assurer le
succes d'un financement speculatif.
2. Risque lie a la garantie. Pour dire les
choses simplement, le risque liE a la garan-
tie concerne la possibilite que la valeur de
liquidation des actifs nantis ne soit pas suf-
fisante pour compenser le solde forme du
principal et de l'interet de la dette. Ce ris-
que se mesure d'apres le pourcentage du
pret consenti par rapport a la valeur des
actifs nantis (on parle ici de "marge de
pret"), la liquidite generale des actifs, le
degre de certitude avec lequel la valeur de
liquidation peut Etre determiner et la capa-
cite du preteur de surveiller les actifs.
1. Risque financier. Le risque financier est
la probabilik que l'entreprise devienne insol-
vable, entrainant sa faillite et la liquidation
des actifs. L'etendue du risque financier
encouru par le preteur depend de deux va-
riables: la structure du capital et la capacite
de gains de l'entreprise:
. Plus le ratio d'endettement (capitaux
empninte_s par rapport aux capitaux pro-
pres) est eleve, plus le risque financier est
grand, car l'entreprise doit utiliser tine por-
tion plus importante de ses gains pour le
service de la dene.
On determine la faisabilik d'un finance-
ment speculatif en soupesant les trois types
de risque. De cette facon, le preteur qui
s'apprete a consentir un financement sur
nantissement des actifs essaie de reduire
son risque de perte global au niveau le plus
proche possible de zero. Le point le plus bas
correspond a la valeur de liquidation des
actifs tandis que le point le plus eleve cor-
respond au rendement du taux d'interet
prescrit. Ces deux facteurs, qui concernent
uniquement le preteur, representent la
difference fondamentale entre les preteurs et
les investisseurs actionnaires, en termes de
risque et de recompense.
Criteres de financement
Voici les principaux facteurs qu'un preteur
considere au moment de decider s'il accor-
dera ou non un pret speculatif.
Caracteristiques de l'entreprise
Les preteurs sur nantissement des actifs
financent souvent des entreprises de fabri-
cation bien etablies et qui ont fait preuve
d'une bonne rentabilite. La marurite de
l'entreprise signifie que ses besoins en ma-
tiere de fonds de roulement sont faciles a
prevoir, et sa croissance moindre signifie
des besoins de tresorerit moins Eleves pour
son expansion. Les entreprises de fabrica-
tion se voient accorder la preference car
elks possedent gEnEralement des comptes
clients et des stocks stables et reg-uliers,
ainsi que des immobilisations corporelies
importantes qui peuvent Etre utilisEes
comme garantie.
Bien entendu, la capacite de la direction
est un element-cle. L'equipe de direction
doit etre fmancierement habile et psycholo-
giquement capable de fonctionner avec une
dette elevee. Les preteurs recherchent des
qualites comme le sens de l'initiative et du
risque et ]'esprit de leadership, lorsqu'ils
examinent la competence et is reputation du
groupe. Comme la capacite de la direc-tion
est fondamentale, le preteur insiste
generalement pour que les proprietaires ou
les dirigeants fassent une mise de fonds
representant une portion substantielie de
leur avoir personnel net, afin de s'assurer
que le risque retombe d'abord sur les nou-
veaux proprietaires.
Situation financiere
En metric temps qu'un dossier soutenu de
benefices, le preteur cherche egalement un
bilan en bonne sante, presentant des actifs
avec une valeur de liquidation egale au prix
d'achat plus les besoins financiers de finan-
cement de ]'exploitation. Ces actifs ne doi-
vent pas avoir etc affectes en garantie au-
pres d'autres preteurs ou de tiers, et l'entre-
prise ne devrait pas avoir de dettes a court
ou a long terme, sinon tres peu, avant le
nouveau financement.
Tresorerie
Les projections de tresorerie feront l'objet
d'une analyse detaillee par le preteur, qui
insisters generalement pour que celles-ci
soient preparees de facon professionnelle,
avec indication precise de toutes les hypo-
theses utilisees. Ces hypotheses seront tes-
tees et remises en doute. Le principal but
vise est de determiner la viabilite de l'entre-
prise nouvellement acquise, notamment sa
capacite a assumer le fardeau financier ad-
ditionnel tree par un financement aussi
eleve.
Qualize des acrifs
La qualite des actifs determine le montant du
financement que le preteur acceptera
d'accorder. La marge de pret consentie de-
pend de la liquidite de la categoric d'actifs
affectee en garantie et d'un certain nombre
d'autres fact curs .
Les comptes clients constituent genera-
lement la categoric avant la plus forte liqui-
dize et, pour cette raison, on leur accorde
habituellement la marge la plus elevEe. D'a-
bord et avant tout, les creances doivent re-
sulter de ventes fermes pour Etre acceptees
comme garantie. En d'autres termes, le re-
couvrement des creances doit Etre assure.
JUILLET 1985 33

13. Pour calc-uler la marge de prat conscntira
sur les comptes clients, Ic pre-tcur
considerc generalement comme inad-
missibles les Elements suivants:
 ventes en consignation et elements fac-
tures au prorata des travaux
 creances de plus de 90 jours
 ventes interentreprises
 credits refuses
 creances qui s'annulent (ventes a un four-
nisseur).
Apres deduction de ces Elements non
admissibles du montant brut des comptes
clients, on applique la marge de prat au
montant net afin de determiner le montant
qui pourra etre prate. Le taux maximum de
prat pour les comptes clients se sirue gene-
ralement entre 80 % et 85 %.
Stocks
Du point de vue du preteur, les stocks corn-
prennent tous les elements qui sons imme-
diatement vendabics. Normalement, en ef-let
Ic preteur n'est pas interesse a completer la
fabrication. C'est pourquoi les produits en
cours sons generalement consideres comme
non admissibles. Pour Ic prix d'a-chat des
matieres premieres et le tout des produits
finis, on applique generalement un taux
maximum de prat de 50 %. Les biens
perissables et ceux qui peuvent deve-nir
rapidement obsolescents se voient toute-fois
attribuer une marge moths elevee, dans les
cas oti Ion accepte d'en tenir compte.
Materiel et outillage
Pour determiner la liquidize du materiel et de
l'outillage et la mane de prat qui sera
appliquee A ces elements d'actif, on de-
mande une evaluation independante de la
valeur de liquidation, appelee aussi valeur de
revente rapide. Les marges de prat pour ces
elements varient de 70 'Io a 90 % de leur
valeur de liquidation.
Evaluation du projet
Pour evaluer la situation de l'emprunteur
(d'apres les criteres deja mentionnes) et. fi-
nalement, pour prendre une decision en cc
qui concerne le financement du proiet, le
preteur exigera au minimum les renseigne-
ments suivants:
breve description du programme de fi-
nancement propose
renseignements de base sur l'entreprise.
notamment ses produits, ses installations
de production, ses fournisseurs et ses
clients el sa structure organisationnelle
analyse du secteur d'activite et du marche
plan directeur de l'entreprise, avec mise
en relief des changements proposes en
matiere d'expioitation
etas financiers, de preference verifies, des
cinq derniers exercices
projections de tresorerie pour les trois
cinq exercices a venir (incluant l'incidence
du financement propose)
profil de l'equipe de direction, avec
COOT-donnees de chaque membre
occupant un poste-cle.
On devrait retrouver la plus grande par-tie
de ces renseignements dans les de-mandes
de financement déjà presentees par les
emprunteurs bien organises, qui les au-ront
fourths de leur propre initiative (ou sur le
conseil de leur conseiller iuridique ou de leur
expert-comptable), en y-ue d'accelerer le
processus decisionnel concer-nant le
financement.
Analyse sur place
L'une des Etapes les plus importantes clans
. la prise de decision du preteur est l'analvse
effecruee sur place des registres financiers
et des operations de l'emprunteur potential.
Ce faisant, le preteur vise deux buts: era-
luer la viabilite de la nouvelle entreprise et
s'assurer de la valeur des actifs pou rani
servir de garantie. L'accent est mis ici stir le
rendement furur, et non sur les resultats
anterieurs de l'entreprise.
Pour un fmancernent sur nantissement des
actifs, le preteur dolt accorder une at-tention
particuliere au pourcentage que re-presente
le benefice brut du dernier exer-cice par
rapport aux benefices bruts realises au cours
des exercices anterieurs, dans la mesure ou it
revele les coats reels et les accumulations de
stocks. Tres souvent, en effet, lorsqu'une
entreprise est sur le point d'etre vendue, on
"laisse partir" les stocks qui ont Ere
accumules au cours des annees durant le
dernier ou les deux derniers exer-cices, de
facon a creer des profits artificiels (dans
I'espoir d'augmenter le prix de vente de
l'entreprise).
Si l'entreprise qu'on envisage d'acqueru est
une filiale ou une division d'une grande
societe, la repartition des frais de gestion et
Tableau 2
Examen du dossier des emprunteurs potentiels
information generole
 Flistorique de l'entreprise
 Description de l'entreprise et des produits
 Dirigeonts et gestionnoires. y compris lo
structure orgonisotionnelle et ies details
concernont les finales et les societes
apparentees
 Details sur les banquet. les
experts-comptables el les conseillers
juridiques
 Main-d'oeuvre et syndicats
 Concurrents
 Marches, strategies et circuits de
commercialisation
 Installations de production
 Fournisseurs
 Reseaux de distribution
Resuttats financiers
 Analyse des cinq derniers &tots financiers (de
preference verifies)
 Examen du plan directeur pour l'exercice en
cours, y compris les prIricipoles hypotheses —
comporer et analyser les previsions les plus
recentes concernont I'exercice en cours el le plan
directeur
Venters of comptes clients
 Politique de vente (remises et escomptes)
 Goronties
 Statistiques concernont les ventes et les notes
de credit
Carnet de commandes
 Expeditions
 Modatites de credit, principes et pratiques de
recouvrement
 Autres caracteristiques importantes
Stocks (le cas echeent)
 Analyse des stocks de cidture pour les cinq
derniers exercices, par cotegorie de produit:
matieres premieres, produits en cours, prodults
finis
Nature et Clot des stocks
Lieux d'entreposage et outtes sites
Duree du cycle de production
Types de registres et precedes de gestion des
stocks
Fourntsseurs et autres crediteurs
Lime chronologique des comptes fournisseurs
Analyse des achots pour lesquels on ne s'est
pas prevalu des remises offertes
Analyse des ochats et des paiements aux
cinq principoux fournisseurs
Examen des remises de le lose sur les ventes, '
des impOts sur le revenu et des retenues
solonoles
Examen des versements felts oux principoux
octionnoires
Analyse des mouvements de tresorerle
Analyse detainee et examen des
projections de tresorerie, y compris des
hypotheses utilises
Exomen visont d assurer que l'incidence des
mouverrients de tresorerie est oclequoternent
refletee dons les etcrts financiers pro forma
ainsi que dons les tableaux concernont les
stocks
immatellisations
Examen de is valeur comptable, de l'onciennete
et du tableau d'amortissement des
immobilisations
Determination du coOt de rempiocement (si
possible)
Recensement de toutes les sOretes reelles
pouvanf exister sur les immobilisations
Assurance
Examen du caroctere odeoual de la
protection
Conclusion et recommandcrtions
Insertion d'un tobleau recapitulatif des
hypotheses-cies critiques et des principoux
risques, tont 6 long qu'd court terrne.
34 CAMAGAZP.,T

14. des frais generaux doit titre examinee en
profondeur; on doit aussi verifier les ser-
vices accordes par la societe mere (compta-
bilite, informatique, personnel, par exem-
pie) ainsi que le caractere raisonnable des
montants factures. On doit s'interroger sur
la facon dont ces services seront assures
apres la vente, ainsi que sur leurs coins. (Le
Tableau 2 fournit un exemple de rapport
pro forma utilise par un preteur pour eva-
luer la qualite des emprunteurs potentiels,
dans le cadre d'un financement sur nantis-
sement des actifs.)
Surveillance des comptes
En raison du risque inherent lie a ce type de
pret et des nombreuses fluctuations de la
valeur des biens donnes en garantie
(comptes clients et stocks), le preteur exige
de l'emprunteur un niveau important d'in-
formation. Ce processus de surveillance des
comptes, unique et tres dlabore, irnplique
l'utilisation de techniques particulieres qui
sont examinees ci-dessous.
Rapport quotidien
Tres souvent, l'emprunteur doit faire quoti-
diennement rapport sur ses ventes, ses re-
couvrements et ses stocks. Il doit en outre
fournir la preuve que les produits ont ete
iivres pour les factures ciepassant tin mon-
tant determine. Cette information est exi-
gee en vue du calcul des fonds disponibld,
qui dependent de la marge de pret accordee.
(Le Tableau 3 fournit un exemple de rap-port
quotidien devant titre fourni par l'em-
prunteur.)
Rapprochement hebdomadaire des comples
Les soldes de I'emprunt des comptes clients
et des stocks font l'objet de rapprochements
frequents (generalement hebdomadaires)
entre les calculs internes du preteur et le
grand livre general de l'emprunteur.
Confirmation des comptes clients
Au moyen de techniques similaires a celles
qu'utilisent les verificateurs, le preteur de-
mande habiruellement confirmation des
creances donnees en garantie directement
aux clients sur une base d'echantillonnage
stratifie. La frequence des confirmations et
la taille des echantillons dependent de
('importance du prEt et des risques qui y
sont lies.
Verifications ou examens zrimestriels
Pour surveiller les resultats de l'emprun-teur
et pour s'assurer que la valeur des biens
donne's en garantie est toujours adequate,
le preteur exige generalement une verifica-
tion tom les trimestres, Ces verifications ou
examens sont generalement effectues par le
personnel specialise de l'entreprise ou par
des experts-comptables travaillant sous
contrat. Ces verifications ont
gentralement uric portee moindre que
l'etude initiate. Neanmoins, titles exigent
beaucoup de la part de l'emprunteur et
constituent par consequent un important
controle de la part du preteur.
Contraintes pour le
preteur et l'emprunteur
Les techniques decrites ci-dessus consti-
tuent les Elements-clEs du processus de sur-
veillance des comptes dans le cas d'un pret
sur nantissement des actifs. II existe d'au-
tres procedes, par exemple l'autorisation
prealable des cheques depassant un certain
montant, que l'on peut appliquer dans des
situations particulieres, compte tenu de
l'importance du pret et du risque lie a ce
pret. Dans l'ensemble, ces procedes se tra-
duisent par des frais genera= importants
pour le preteur, ce qui explique en partie
pourquoi ces prets sont generalement
consentis a des taux d'interet de un a trois
pour cent plus eleves que les taux d'interet
demandes pour les prets traditionnels.
Pour l'emprunteur, ces procedes se tra-
duisent par un fardeau considerable en
termes de registres a tenir, un accroisse-
merit des besoins en personnel et un inves-
tissement en temps de la part de l'equipe
dc direction. Pour ces raisons, les emprun-
teurs qui songent a obtenir du financement
sur nantissement des actifs dans le cadre
d'un financement spec-ulatif devraient Cue
prepares, tam physiquement que morale-
ment, a presenter une information finan-
ciere volumineuse et a accepter une
surveil-lance etroite de leurs affaires de la
part du preteur.
Les prEts sur nantissement des actifs
constituent un outil efficace pour le finan-
cement d'une acquisition lorsque les actifs
de l'entreprise absorb& constituent une ga-
rantie suffisamment forte pour obtenir un
prEt correspondent a une portion irnpor-
tante du prix d'achat, ainsi que les fonds
suffisants pour les operations a moven ou
long terme. Si l'acheteur cherche a
maximi-ser l'effet de levier, le financement
sur nan-tissement des actifs peut se
reveler un outil precieux. Les investisseurs
doivent cepen-dant accepter de payer
davantage pour ce genre d'emprunt que
pour une date classi-que et d'avoir
constamment le preteur derriere le dos. •
Tableau 3
Rapport quotidien de l'emprunteur
Situation des comples clients
1. Total des creances dela mobilisees
2. Ajouter: ventes 6 cornpter de
cette date (factures ci-lointes)
3. Montant brut total des creonces mobilisees
4. Deduire, a) recouvrements depuis aerie date
(rapport el-Joint)
b. prelevements et
credits (documents ci-
joints)
a. outres redressements (precIset) Total des
deductions (o-c)
5. Montont net total des creances mobilisees
6. Deduire: a) creances non odmissibles en date du .. b)
outres (preclser)
7. Total des creances admissibles
8. Pret maximum disponible sur nontissement des comples clients
Situation des prets et des avonces debiteurs
9. Solde, au debut (ligne 13 du precedent rapport)
1. Deduire: a)
recouvrements 6 acne dote
(ligne 4o)
b) redressements (preciser)
1. Somme partielie
2. Avances demandees
3. Nouveau solde
4. Prot disponible sur comples clients (ligne 8)
5. Excedent des comptes clients ou (pret sur stocks) Ilignes 13 et 14)
xxxxx
xxxxx
Situation du pret sur stocks
16, Solde du pret stir stocks Plane 16, le cos echeant)
17. Derniere declaration concernont les stocks (date)
1. Pourcentoge du financement sur stocks (lignes 16 et 17)
xxxxx
XXXXX
JUILLET 1985 35