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. 

Team Update - Stuart Donald Joins Conduit Finance

Conduit Finance are pleased to announce Stuart Donald has joined our team to lead our Corporate Finance offering.

Stu joined Conduit in 2015 to help expand our capabilities in the complex corporate and SME space. 

With a track record of arranging and executing financings for MBOs, BIMBOs, Secondary buyouts and other event driven financings Stu has a broad experience of working with management teams to help deliver returns. 

Stu has previously worked for Citigroup, Deutsche Bank and Santander with diverse sector experience across:

• Healthcare, including facilities to support the acquisition of a portfolio of care homes by the UK’s largest care home operator and the refinance of a high street non-invasive cosmetic surgery group. 
• Technology, including the LBO of a SaaS Talent Management/ Talent Acquisition business and the restructure of psychometric testing business.
• Business services, including the BIMBO of the first transaction in the legal services sector and the restructure of a crash test dummy business. 
• Hospitality and leisure, including roll out facility for Europe’s largest fast casual Mexican burrito group, the refinancing of the UK’s fastest growing burger restaurant group and the refinancing of the UK's largest theatre group and subsequent expansion into Broadway.

More recently in 2014 and 2015 he has started his own ventures in online travel and restaurants, which gives him a unique perspective into the challenges faced by owner managed businesses. 

He has a BA (Hons) from Strathclyde University, an MSc from Edinburgh University and an MBA from Columbia Business School and London Business School. 

For further details please contact Stuart directly on Stu@ConduitFinance.com or call 0131 564 0172.