Benchmarking Risk©
ARG, exclusively, gives you the tools to monitor your portfolio on a weekly or monthly basis. It is necessary that lenders monitor the adequacy of collateral on a frequent basis to ensure that advance rates are in-line with current inventory. The tools in ARG reports are designed to give the Lender guidance as to the effect changes in inventory composition have on recovery. As noted below, these changes are cumulative. The changes to be monitored are as follows:
- Varying Inventory Levels – As inventories
decrease or increase, the net recovery will change in
a direct relationship to the change in inventory. This
happens because the change in inventory level will produce
commensurately larger or smaller pools of gross recovery
against which expenses are offset. Expenses do not fluctuate
as much as inventory recoveries. This is shown on the
following graph. Click on the graph for a larger image.
- Varying Finished Goods as a % of Total Inventory
– Typically finished goods have a higher net recovery
than other inventory components. They have been completed
to the point of being readily salable to customers. As
the percentage of finished goods to total inventory changes,
the net recovery changes in a direct relationship as shown
below. Click on the graph for a larger image.
- Varying Gross Margin % – Higher gross margins
will typically produce higher gross recoveries. In an
orderly liquidation, the price for which an item is liquidated
is related to the price for which that item has recently
been sold. If a company is experiencing declining gross
margins, it is selling its product to customers at lower
prices relative to the cost. This will be reflected in
the liquidation recovery as in the following graph. Click on the graph for a larger image.
- Varying Top Producing SKU's as a % of Total –
While ARG does not agree with the "80/20" rule (that 80%
of the value will be produced by 20% of the inventory),
the mix of the merchandise does directly affect the return
in a liquidation. ARG allows the lender to monitors the
inventory mix by ranking the inventory at the SKU level
by sales. When a significant percentage of the sales are
accounted for at 80% or 90%, the inventory should be subtotaled
and expressed as a percent of the total inventory. As
this percent decreases, so will the recoveries as shown
on the following graph. Click on the graph for a larger image.
Cumulative Effect of Changes. It is extremely important to note that the effect of the above changes is cumulative. ARG has added notes, "Call ARG", on each graph, to indicate that a reappraisal of the inventory is prudent because that particular benchmark has deteriorated to the point that the collateral value is in jeopardy. These points are indicated at a level of decline for each benchmark that would result in a loss of net recovery of approximately 5%. However, if three benchmarks decline by 3% to 4% each, which would not independently cause concern, the cumulative effect would be a decline of 9% to 12% in the net recovery value of the inventory.
These benchmarks are estimates only and extrapolated from current data and, as such, not intended to replace periodic reappraisals. At each reappraisal the benchmarks will be reset to provide for the company's current operating experience.
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