Creating Solutions Finance

ICON purchases a challenged asset from a manufacturing client with an initial book value of $200,000 and a current market value of $100,000.

ICON pays $200,000 of Trade Credit redeemable for media equally over the term of the contract with a mutually agreed cash/trade credit blend.

Manufacturing Client purchases Media (already within their existing budgeted expense) through ICON at their current benchmark pricing set by Manufacturers Agency.

Financial Benefit to Client. With ICON purchasing the challenged asset, the transaction results in the manufacturer recovering the market value loss on the inventory ($100,000) through reduced cash-based media expense over the term of the contract.

Note: In this example the asset should already have been reserved at 50% with a net book value of $100,000. Assuming however that no write-down has occurred, EITF Abstract 93-11 generally requires the write-down of the product being sold to $100,000 (fair value of the product sold) with the benefit from the remaining $100,000 of trade credit recognized as the trade credit is redeemed.

In a cash-based transaction, ICON purchases the client’s asset and delivers cash at closing using a standard Purchase and Sale agreement.  At closing, the client and ICON also execute a Vendor Subscription Agreement (VSA), which is an all-cash media buying agreement. 

Boiled down, the VSA states that the client is agreeing to make a payment to ICON called the Guaranteed Minimum Payment (GMP), which is equal to the amount of cash delivered for the client’s asset with a time-value applied based on the term-length the client chooses in which to purchase the media. 

The client meets the GMP requirement buy purchasing media through ICON on a cash basis.  Each time media is purchased, the dollar amount of media placed is multiplied by the Minimum Credit Ratio (analogous to the cash-to-trade credit ratio in a trade credit transaction), and the product is credited as a reduction to the client’s GMP requirement

Example:  Assume a $1M media purchase and a Minimum Credit Ratio of 15%

In this way, as media is bought over the term of the agreement, the client’s GMP requirement is extinguished and the transaction is completed.

If clients purchase more media than is required in a given agreement year, the overage to GMP is applied to reduce the GMP requirement for the following agreement year.  If clients do not purchase a sufficient amount of media in any year of the VSA transaction to satisfy that year’s GMP requirement, they are required to make a payment to ICON to satisfy the shortfall to achieved GMP.  If this were to occur, the client can receive credit for this payment by purchasing additional media through ICON in a future year in which they have satisfied that year’s GMP requirement.

As an example of a transaction over a 3-year term, assume a Minimum Credit Ratio of 15% and a Guaranteed Minimum Payment for each anniversary date of $1 million for three (3) years. The total purchase price for advertising over 3 years is $20 million, and this is structured in equal annual increments of  $6,666,667 per year.  If the client only purchases and pays for $5,000,000 of media in the first year, which when multiplied by the 15% Minimum Credit Ratio would generate $750,000 of GMP, they would be required to make a Minimum Payment to ICON of $250,000 to satisfy that year’s GMP shortfall. 

If in the following year the customer purchased $8,333,333 of media advertising, the customer would first meet the current year’s Guaranteed Minimum Payment of $1 million (purchase price of $6,666,667 multiplied by 15% Minimum Credit Ratio). The remaining $1,666,667 of media purchase price would be satisfied by the client’s payment of $1,416,667 in cash and application of the $250,000 Minimum Payment made previously as a credit to cover the balance of media payment.