Working with a Borrower to implement a forbearance and loan sale.
Lender’s Loan and Concern
Lender was a 15% participant in a $90MM syndicated revolving credit and term loan facility which was agented by a large money center bank. As a result of declining industry fundamentals, the Borrower’s revenue took a nosedive, and cash flow was not adequate to service debt. Lender classified loan as non-accrual with significant charge-offs taken by members of the bank syndicate. The results of Borrower’s liquidation analysis disclosed that a bankruptcy and liquidation would yield a recovery of less than 25 cents on the dollar for the lenders, resulting in potential additional charge-off. Lender also had unfunded standby letter of credit exposure which could result in additional funded debt.
Borrower’s Needs and Concerns
Borrower was in the home remodeling business. The general downturn in the economy, particularly in home construction and home improvement, was primarily responsible for borrower’s financial difficulties. Borrower’s objective was to continue to obtain additional working capital to operate its business until there is a turnaround in the home building and remodeling industry. Bankruptcy or liquidation of the business would subject the owners to additional potential liability under their limited guaranties, and lead to consequences for other related non-borrowers. This concern is more pronounced because of the expected low realization value of the assets in the event of a liquidation.
Outcome and Results
Working for his former employer, a principal of BSD Advisors, in conjunction with other members of the bank group were able to identify a buyer for the bank group’s loans which yielded a recovery of approximately 45 cents on the dollar for the lenders, and provided the Borrower with the needed time and working capital. The Note Buyer provided a replacement standby letter of credit for the borrower which eliminated the need for additional charge-off for Lender. The end result is that the lenders realized a 45% repayment instead pouring more money into a business with expected liquidation value of 25%.
Lesson Learned – At some point, certain loans do not lend themselves to traditional bank financing due to constraints placed on banks by regulation and shareholder expectations. There are often alternative lenders who have the patience and flexibility to finance deals that traditional lenders will not finance. In this case, the prior lenders found an opportunity to limit their potential losses while the borrower achieved its objective by finding a longer term partner.