NOLV

Net orderly liquidation value is the estimate of what a company would receive if its assets were sold in an orderly manner over a reasonable period of six to nine months. It lies between market value, obtained with normal market exposure and informed buyers, and forced liquidation value, which rests on an auction sale. An appraiser independent of the credit transaction establishes the NOLV. Lenders use it as the reference for valuing collateral in preference to cost or retail price. In asset-based lending, the NOLV of inventory is the basis for the advance rate that sets the amount available to borrow. The usual advance rate is 80% of the NOLV of eligible inventory or 65% of its book value. Competition has pushed some rates to 85% or 90% of NOLV. Lenders renew the appraisal over the life of the loan, at a frequency that increases when difficulties appear. For the borrower, each new appraisal changes the borrowing base: a fall in NOLV reduces the amount available under the facility without any additional drawing.

A spare parts distributor holds €100m of inventory at cost. The appraiser sets its NOLV at €62m. With an advance rate of 80% of NOLV, the inventory component of the borrowing base reaches €49.6m. Six months later, a new appraisal at €55m brings this component down to €44m.

• The independence and method of the appraiser who sets the NOLV
• The advance rate applied to the NOLV for each inventory category
• The frequency of reappraisals set in the agreement
• The effect of a fall in NOLV on the amount available under the facility