Don’t let personal recourse catch you out

Prior to the global financial crisis, access to funding was relatively straight forward.  Banks and specialist lenders would lend in most cases with light due diligence.

Following this downturn, banks have spent years trying to exit residential and commercial real estate transactions, with a glut of non-performing loans being sold onto specialist loan servicing funds to recover the debt.  

As a result of this we have seen a seismic shift in the care and attention taken by borrowers when taking on fresh debt or restructuring.  Many have had their fingers burnt, or know of someone local to them who has, with the ultimate backstop being the Personal Guarantee they signed.  

I expect many didn’t appreciate the extent to which this would impact their personal situation, long after the restructure or Administration.  

Borrowers now seem much clearer, and focused, on the personal recourse being requested from new funders.  In the boom years borrowers would simply sign the documents so they could get on with the project in hand, without giving too much thought or attention to the potential recourse. 

Most guarantees were via joint and several liability of the individual Directors of the business.

A Personal Guarantee is a written, legal promise from an individual to repay any shortfall on a specific loan or account which cannot be met by the principle debtor, normally the Single Purpose Vehicle (SPV) or trading business.  As mentioned above, most guarantees require joint and several liabilities, meaning that each individual who signs a guarantee can be held responsible for the whole amount of the debt.  

Personal Guarantees aren’t always standard, but can be negotiated to a certain point.  However your willingness to sign a personal guarantee reflects your commitment to the success of the business or transaction, by putting your personal assets at risk.  When a Personal Guarantee is signed, the signatory becomes personally liable for the loan, even if the business is incorporated with limited liability, or offshore.

We are finding an increasing concern from Directors of borrowing entities to put up personal guarantees to enable transactions to proceed.  This effectively leads to a stalemate, if an amicable middle ground cannot be achieved.

One solution is Personal Guarantee Insurance.  It is a fairly new product to the UK market, and is generating some serious interest from our customers.  It helps Directors insure against the potential risk the Personal Guarantees would impose if the deal went sour.  

Insurance policies are tailored for Directors who are exposed to Personal Guarantees, indemnifying a set proportion of the liability.  The insurance will pay out a percentage of the liability under the Personal Guarantee, which is often capped after a certain amount of time to around 90% of the maximum value. 

The amount of cover is dependent on the value of the Personal Guarantee given, and the length of time the insurance has been in place.  This insurance is used to give the director of new enterprises peace of mind as they progress into success.

We have successfully negotiated a number of Personal Guarantee liabilities down on behalf of our borrowers.  Across a range of sectors from Construction to Leisure we have exited positions for guarantees from £100,000 to £8,000,000. 

We utilised a range of proven structures and negotiating strategies to deliver results, a recent example being a £2,000,000 personal guarantee liability being settled for £0. 

If this advisory service would be of benefit then contact our Business Development Director Mark Reidy or our Managing Director Jamie Davidson to discuss on 0131 564 0172.

Jamie Davidson | Jamie@ConduitFinance.com 

Mark Reidy | Mark@ConduitFinance.com 

The Evolution of Highly Geared Private Debt

The Evolution of Highly Geared Private Debt

In both vanilla and also restructuring transactions private debt is playing a pivotal role in making transactions happen.  The use is broader than its name might suggest.  It spans both corporate and property borrowing, and can come from private individuals, family offices or from larger funds.

There is a global availability of private debt lending from a range of sources, all of whom are hungry for an upper single digit, or double digit return per annum.  There are a number of local, US, European and Asian funding lines currently active in the UK.  These lenders are active in London but the real margins they seek are accessible in the regions.

Their appetite and liquidity is driven by a number of macro reasons such as the contraction of
European and U.S retail bank’s balance sheets, and the lack of dividends and yield available from equities.

These lenders have several unique selling points, such as short reporting lines that enable quick decisions to be made, pan‐European appetite out of one main office, and their flexibility when structuring covenants.  

If their benefits were ranked then gearing would be number one, certainty and ability to quickly deliver as number two, and number three would be the repayment structures, which can be interest only, rolled up or back loaded.

Recent term sheets we have delivered include: 

• 75% loan to value (LTV) facility on a single tenant office investment acquisition, at a 6.00% rate with only 4 years remaining on the lease.
• 90% LTV for a well located commercial building refinance at an 8.00% rate, which was going through a Bank of Scotland Business Support Unit (BSU) restructuring.
• 75% LTV bridge finance facility at 1.00% per month, for a hotel and land site exit from Royal Bank of Scotland Global Restructuring (GRG).

Pricing can vary depending on the transaction, with the leanest rates from 4.00% per annum for well located property investment lending, up to 15.00% for infrastructure lending.  They invariably seek “make whole” provisions to ensure they get a fixed return.

Much like the rest of the UK property and corporate lending market, there is a brisk evolution happening.  Interest margins are being compressed and there is a gradual uptick in LTV’s, which leads to a direct correlation in increased risk.

The record high volumes of lending in 2015 look set to continue into 2016 and beyond. 

Jamie Davidson I Managing Director I 0131 564 0172

Search for private debt bridging options here: Property Finance Finder

www.ConduitFinance.com

Risk v Rate - achieving balance in the lending process

Risk v Rate

A 0.25% increase signals economic growth and brighter business opportunities on the horizon for 2016, but what does this mean for the UK lending market? 

The sun is out but confusion is rife as the economy improves.  Lenders are issuing credit under competitive pressures, and whilst also trying to gauge credit risk policy, at the same time as the market quickly evolves.

Interest margins are being slashed with discussions invariably ending 1.5% below where the conversation began, and that's just the margin.  Understanding what lenders have offered recently is crucial to get to the lowest end of their pricing matrix. 

Lenders’ arrangement fees are also compressing, with a 0.25% to 0.50% expected to be the norm in time. 

In a recent fund rising negotiation the borrower was saving £50,000 per week, as we hurtled through the lender beauty parade.  It's the race to the bottom on pricing, and also the race to who loses capital first.

The volume of available of liquidity continues to surprise, but as ever availability doesn't mean accessibility.  Prime credit policy is tight, which is creating a large and evolving specialist lending marketplace where flexibility and speed are USP's. 

From a borrowers perspective the alternative lenders can represent fantastic value.  A rate of 6% may not be appealing but it can be dynamic and profitable if utilised for an asset management opportunity or to secure a debt forgiveness package from an incumbent bank. 

Whatever tier of the market a transaction falls into, there is price confusion as the reward isn't reflecting the risk.  Non-recourse finance is more available than ever since 2007, with lenders backing asset and economic growth.

If we base our opinion on recent experiences in restructuring and debt forgiveness, then having personal guarantees in place does ensure that the Directors/borrowers do stay at the table.  This is both good news for the bank, and in retrospect oddly good news for borrowers.

If they have negotiated patiently most of the borrowers with personal guarantees have managed solvent restructures, which means they have recovered all assets, avoided personal guarantee enforcement, and had their debt written down.  Whether it’s serviced by trading business EBITDA or by rental income the outcomes can have been the same.

Serviceability calculations, and more importantly sensitised debt service calculations, are being made on heavily biased assumptions to ensure that any credit issued is "safe". 

How does a lender get an edge and get deal flow?  I'm awaiting a third factor, but in the meantime it's simply lower pricing and loosening credit risk policy, which is great news for borrowers. 

It's going to be a very interesting 2016.

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Contact Jamie direct on 0131 564 0172 or email jamie@conduitfinance.com 

Direct Lending Market Buoyant

The SME corporate finance debt landscape has changed significantly over the past 6 years. 

Old institutions have disappeared, or scaled back activity and in their place is a growing pool of liquidity managed by a large number of fund managers.  These direct lending funds now play a major role in sponsor led event financings, and will increasingly be relevant to private companies without a financial sponsor.

Find out how direct lending and private debt can accelerate the growth of your business here.

Contact Stu Donald on Stu@ConduitFinance.com to see if direct lending could accelerate the growth of your company or negate the need for other types of finance.