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 

Fast Refinance to Avert Enforcement

We were approached by a new client in July 2015, after his debt was sold on to Cerberus from Clydesdale Bank.  The client was aware from other borrowers of Cerberus’ reputation and fact they would shortly be demanding full settlement of this lending facility.  He was therefore uncomfortable having his loan with them, and was seeking fast and constructive input to restructure and refinance.  

The client, like many who work with Conduit Finance, is an entrepreneur who runs his own business and has a property portfolio to compliment his trading business.  While technically complex to deliver, his request and mandate to us was simple; to have access to the whole of the market via one trusted contact with ease and speed of process. 

The key components of the deal were; moving properties from a Limited Company of which the client was the sole director and shareholder, repaying the entire debt in one drawdown in order to avoid any enforcement action by Cerberus, no additional cash input from the client, and a new to market, flexible lender who the client could carry out further business with post restructure. 

In order to save time and ensure complete clarity on the scope and process, we had two separate face-to-face meetings early in the process to gather all of the relevant information we knew all lenders would be looking for.  We took a few days to find the three best options on the market and presented these to the client, outlining with complete transparency the benefits and pitfalls of each.  

The criteria for each funder can be defined as follows:

Option 1 - lowest pricing.
Option 2 - speed of completion.
Option 3 - a new and reliable funding partner best suited for his future borrowing requirements.

Having considered our proposal, the client selected his preference and we continued in earnest with the underwriting process.  Due to a lower than expected valuation on one of the assets, additional funds were required. This was not an option for the client as cash-flow was at that time tight.  On review of our options and taking stock of the assets and the borrowers’ emotional engagement and future plans, we were able to combine the new debt with fast sale of a plot of land to repay Cerberus. 

In order to move the properties at their full value out of the Limited Company and into the client’s personal name, we worked side-by-side with his accountant to structure this properly to avoid the client having to liquidate any further assets.

The client was excellent to work with and committed to the process.  He was extremely busy throughout the transactions, so we were able to streamline the process for him as much as possible, and at the same time identifying funders able to support his plans for the future.

Conduit Finance’s technical acumen, deep knowledge of the market and direct access to specialist funders allowed us to add value to the client’s business and ensure the client is able to continue trading, grow his business and look forward to the future.  Post completion of this deal we have had 2 new individuals referred to us by the client. 

Meet the Team - Sean Crombie

Sean joined Conduit Finance in September 2015 as a Business Development Manager, working closely with our Business Development Director, Mark Reidy, and our Managing Director Jamie Davidson.

He started his career as a professional rugby player aged 19, and studied Business & Economics at the same time.  During his rugby career he played for Aberdeen Grammar, Border Reivers, Edinburgh Rugby and Newcastle Falcons.

He currently plays for Boroughmuir RFC in Edinburgh. 

Sean has worked on building and strengthening our external relationships with both clients and lenders. On a day to day basis he works with developers and landlords across the UK, helping them efficiently acquire and develop residential and commercial properties. 

The completion of a £1.1m property bridge in London in 7 days stands out as a recent success. It was the speed of the completion that was impressive, considering the lender was new to market.  They also didn't require a valuation which helped save time. 

Other recent successes include the debt forgiveness restructuring of an office investment away from Cerberus, and the funding of a residential development project at a 2.5% margin. 

Sean works closely with our research team to quickly release the specifics of any new to market lenders.  He is currently helping borrowers secure competitive stretched senior development funding at high LTC's, and flexible bridging finance from 0.60% pm. 

He is also working with a number of clients who have had their loans sold on to Cerberus, CarVal, Kennedy Wilson and Lone Star. These loans can be quickly and efficiently refinanced away from the loan managers, who are invariably Pepper/Engage Commercial. 

Restructuring is a specialist service Sean and the wider team can provide.

If you require live pricing or want to hear who the new to market lenders are, then please call Sean on 0131 564 0172, or email Sean@ConduitFinance.com 

£6m Solvent Restructuring Protects Family Leisure Business.

In mid-January we were contacted by a business owner who was under pressure, he had been referred to us by a surveyor. 

After many months of negotiations he had agreed terms to exit the Global Restructuring Group (GRG), of the Royal Bank of Scotland (RBS).  Transactions of this nature are time pressured, and if the finance isn't delivered then an enforced sale, administration or liquidation awaits.

During the first call I was able to reassure the client with a high degree of confidence that we could deliver the finance and protect his business, as we had recently delivered a number of similar transactions.  The experience my colleague Andy Lawson and I gathered whilst working in SME and Property banking also helped us structure and deliver a bespoke solution, which enabled us to solve the various issues.

The primary problem was that the funder he had terms from had pulled out, owing to a basic error in their valuation assumptions.  The new lender wanted to lend off a 90-day assumption, which resulted in a far lower loan than if they were lending off a full open market valuation figure.  The deal didn't work for the borrower, as it left him short of what was needed to settle the current loan and allow the business working capital to breathe.

We work with lenders who use this 90-day assumption, but it can be difficult to get the loan needed to match the loan offered, owing to the variable nature of the net loan sum versus the actual open market value.  On this topic we always advocate engaging with surveyors earlier in the process than normal, to de-risk the valuation figures and to avoid last minute surprises.

The security in question consisted of a lucrative land site with planning consent for new houses, and a trading business in the leisure sector.  The land had a simple valuation metric based on a value per plot, and a net land value after a work back from a gross development value.  The leisure business was profitable, but was taken on a vacant possession basis as opposed to an EDITDA multiple, so a suppressed 90-day valuation off a 65% loan-to-value metric would result in a 50%-55% loan to open market value ratio.  The assets were the product of many years of hard work, financial investment and marketing creativity, so their emotional value was almost equal to the financial value. 

Our involvement was focused on the fund raising. The components were simple; we had a fixed net number to redeem RBS GRG, a working capital float to raise and the loan needed to cover all associated transactional costs plus the lenders interest and fees.

The scope was challenging and simple in equal measure, to deliver the finance in 4 weeks.  This ruled out the vast number of lenders in the short term lending market, and despite what lenders purport, most are unable to deliver £6,000,000 of finance in this time frame.  The asset class and exit strategy also did not fit with most lenders.  Then finally, and crucially, we required a lender who was able to lend off an open market value figure, and not a 90-day valuation figure.  Through our ongoing investment in lender research and our relationships with funders we were able to quickly, and with confidence, select a lender that would deliver.

Thereafter Andy Lawson worked closely with the borrower to quickly advance the documentation and lenders due diligence requirements.  Starting at 7:30am and exchanging emails well past midnight Andy worked solely on this transaction from enquiry to close, including weekends.  His role involved the coordination of all parties, including the lenders solicitor, the borrower’s solicitor, the valuer, and of course the lender themselves.

The primary value we added to the process was to deliver a lender who would act quickly.  As crucial as lender sourcing is, just as important is the transactional support we provide to drive the deal forward quickly, whilst commercially navigating all obstacles.  The legal process remains the main time delay in transactions, with the selection of solicitors being a key focus when preparing a deal plan.

On the 22nd of February the funds were remitted and the deal closed.  After a short and intense sprint, the borrower was back in control of his assets and able to look to the future growth and profitability of his business, without the burden of potential insolvency.

Solvent restructuring is a specialist service we provide to borrowers and sponsors of Corporate and SME businesses, as well as developers and investors running property companies.

Our recent successes have been UK-wide and for businesses with £1m to £80m of debt and/or asset value, and we have experience in formulating strategies and delivering written down exits for Personal Guarantees.  Our recent mandates are across a range of asset classes from Anaerobic Digestion plants in the Renewables sector, to Golf Courses and Hotels in the Leisure sector.  Based in Edinburgh and active in London, we have also closed several cross border restructures for Isle of Man, Guernsey and British Virgin Island (BVI) companies.

If you, or your clients, are facing a restructure in the UK, or offshore, and need urgent, reliable finance options along with creative advisory services then contact Jamie Davidson at Conduit Finance. 

Jamie Davidson I Managing Director I 0131 564 0172

Jamie@ConduitFinance.com