Collateral Eligibility Criteria

Receivable facilities often exclude invoices more than 90 days past invoice date or 60 days past due, disputed accounts, affiliate receivables, government receivables without proper assignment rights, and cross-aged obligor balances.

Inventory facilities often exclude work-in-process, obsolete inventory, consigned inventory, inventory outside approved locations, goods subject to landlord liens, and goods without adequate insurance.

Loan and receivable pools often exclude defaulted loans, modified loans, loans missing documentation, loans above LTV limits, and loans with incomplete perfection or assignment records.

Eligibility criteria usually appear in the credit agreement, purchase agreement, security agreement, servicing agreement, or offering supplement. In marketplace deals, simplified versions may appear in credit snapshot tables.

The strongest deals define eligibility objectively and require periodic reporting that reconciles total collateral to eligible collateral.

Ask for total collateral, ineligible collateral, reason codes for exclusions, and trend data.

Watch for eligibility drift: more aged receivables, more exceptions, higher customer disputes, or repeated waivers can precede borrowing base stress.

Start with $15 million of reported collateral. Remove $1 million past the aging limit, $750,000 with documentation defects, and $1.25 million above concentration caps, leaving $12 million eligible.

At an 80% advance rate the pool supports $9.6 million before reserves. Applying 80% to the unfiltered balance would overstate availability by $2.4 million.

Eligibility can be represented by the seller when an asset enters the pool and retested on each borrowing-base date. Breach remedies may require cure, substitution, repurchase, exclusion, or indemnity.

Those remedies depend on timely discovery and a solvent provider; they do not replace collateral-level verification or automatically return cash to investors.

Exception reports should distinguish temporary data gaps, approved waivers, disputed defects, and permanent exclusions. Growth can mask deterioration when new assets enlarge the denominator while older cohorts become ineligible.

Track ineligible balances by reason, vintage, seller, and cure status, plus how often previously eligible assets migrate out of the base.

Confirm title, assignment, perfection, custody, obligor notice, insurance, data completeness, and controlled collections rather than relying only on economic filters. An otherwise sound receivable may not support lending if it cannot be transferred or enforced.

Reconcile asset tapes with source documents, servicer systems, bank accounts, field exams, and trustee reports.

For Collateral Eligibility Criteria, start with the asset schedule and the control package. Confirm borrower, obligor, collateral type, eligibility rules, lien priority, perfection, account control, reporting cadence, servicer duties, and who can redirect cash after a default or trigger event.

Eligibility is often the most important protection. A receivable, loan, or asset may be excluded because it is aged, disputed, concentrated, ineligible by geography, subject to setoff, unsupported by documentation, or already pledged elsewhere.

Review whether the lender can independently verify collateral through bank data, invoices, title records, servicer tapes, field exams, appraisals, or third-party reports. Borrower-prepared reports without verification deserve a larger haircut.

Rebuild the reported metric from source data. For delinquency, start with the full loan tape and aging policy. For borrowing base or advance rate, start with gross collateral, remove ineligible assets, apply haircuts, concentration caps, and reserves, then compare with funded debt.

Example: a $20 million receivable pool at an 80% advance rate suggests $16 million of capacity. If $3 million is over 90 days, $2 million is concentrated above caps, and a $1 million dilution reserve applies, eligible collateral may support only $11 million of borrowing.

Document whether charge-offs, modifications, deferrals, renewals, loan sales, or repurchases are excluded from the numerator or denominator. Definitions can make performance look cleaner than cash collections justify.

Map what happens when the metric deteriorates: availability reduction, cash dominion, reserve increase, borrowing-base deficiency cure, default, amortization, collateral substitution, servicing transfer, or workout handoff.

The timing of enforcement matters. A monthly borrowing-base certificate may lag real deterioration by weeks; a quarterly covenant may lag by months. Test whether the lender receives enough information to act while collateral still has value.

Review waivers and amendments. Repeated waivers can preserve a borrower relationship but may also hide a deteriorating collateral base and reduce recovery for noteholders.

Track beginning collateral, additions, collections, payoffs, delinquencies, defaults, recoveries, charge-offs, ineligibles, reserves, utilization, excess availability, concentration, and debt outstanding. The dashboard should reconcile to cash, not only to balances.

Red flags include rising early-stage delinquencies, slower collections, growing ineligibles, repeated collateral substitutions, unexplained reserve releases, borrower-prepared tapes with no verification, servicer changes, and utilization near the borrowing base.

Stress cases should combine lower collateral value, slower liquidation, higher expenses, legal delays, and weaker recoveries. A single mild stress can make a secured loan look safer than the actual downside path.