Lending Gossip May 2011
Today I’d like to talk about one of my latest clients, as its a good look into the current lending market and explains why its so important to have a full and complete loan package.
My client consisted of two partners running a commercial real estate development firm. As you know the last few years have been a “bit difficult” for developers, however these two were smart in that they timed the market and sold the majority of their properties in 2006 before the market started its downhill slide. During the last few years, the partners spent some of the down time soul-searching what they could do to even out the continual gyrations that any CRE developer experiences- some years are great and some awful. Their decision was to use the funds they had made in 2006 to purchase an operating company with decent cash flow that would help even out cash flow.
With that in mind they started their research, finally settling (after 200 or so) on a local company. This company managed to do very well during the recession and had long-term employees that ran the day to day operations. The price was negotiated and they started looking at funding. While they were very conversant in CRE lending, they quickly came to realize that they knew little about acquisition loan or the line of credit that would be necessary, which is where Biz Loan Link came into the picture.
I put together a comprehensive loan package, which ended up consisting of 79 different documents (that’s not a typo) and we chose 12 different banks to look at the project. The biggest issues I predicted would be that the buyers were moving into a new industry and there would be a certain amount of goodwill. No problem, I thought, the buyers have several pros:
1) there was significant cash held by the guarantors- enough to buy the company (and then some) without the loan
2) the guarantors have a successful long-term track record of owning and running companies in different industries
3) the company being purchased shows more than enough cash flow even during the recession to service the debt
Boy was I wrong!
Out of 12 banks we got the following response:
-4 turned us down without even meeting the buyers, citing both the issues I predicted earlier. However I would never expect a banker to turn down a prospect without even meeting them!
-4 banks came up with a deal where the more wealthy guarantor would simply borrow part or all of the money personally and then loan it to the company. A non-starter for the guarantor as the whole reason to have the company borrow the money was so that he could keep his liquidity for future possible transactions.
-2 banks would give small loans and lines of credit with the remainder coming from the guarantor. A less painful scenario for the partners but the banks were also asking for a number of additional covenants and appraisals that would be expensive and time consuming.
What the above responses suggest is that there are still a good percentage of banks that are completely in fear mode, or that the lenders are so beaten down by the last few years that they just don’t have the energy or desire to look at anything that might be outside the bank’s small box. I’d like to add that some of the loan offers were from EXISTING banking relationships with the partners, thus making it more important than before to talk to lots of banks. There is no counting on your current bank to get the deal done at all let alone get you the best deal.
-The last 2 banks were similar in pricing, and exactly the same amounts. The bank that came in second wanted a borrowing base on the line and a collateral audit, along with several financial covenants. However, these were all within reason based on my experience and theirs.
The last bank blew us away. The term on the acquiring loan was several YEARS longer, there were no financial covenants, and no collateral exam as well as no borrowing base certificate on the line of credit. I was shocked that they could actually get this past their credit people as bank auditors frown on no covenant loans in general and without covenants or borrowing base they were taking on a lot more risk than any bank offer I had seen since the height of the bubble. Of course we took this one! They are now finishing up documentation and should be taking over their new company in the next few weeks. Congratulations!
The reason I wanted to pass along this story is to reassure my readers that, yes, deals are getting done, sometimes with spectacular results. However, as you can see by the wide range of answers from the banks, its still a bit of a crap shoot out there. It is important to have a great package and to talk to a lot of banks at the same time, even if you think your current bank will help you. If you don’t have the time or the energy to do that I’d be happy to take it off your hands!
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