Reprint from Nation’s Building News – The Official Online Newspaper of NAHB
Debt Restructuring: Moderating Factors and Lessons Learned
(This is the fifth and final article in a series on what builders need to know about restructuring their debt and planning for surviving financial adversity in today’s real estate market.)
By David McCain and Bill Albers, MPKA, LLC
Once a debt restructuring specialist has been hired and the process of restructuring begins, there are many factors — both subjective and objective — that can come into play and affect the outcome of the negotiations and the timeliness of the deal.
From a subjective standpoint, all of the participants — the borrower, capital provider, lender, outside counsel and debt restructure specialist — have different perspectives, goals and personalities that must be taken into account:
• Borrowers are motivated by financial survival, protecting their personal balance sheets and devising a strategy that will enable them to still be around to profit during the next positive business cycle.
• Capital providers and investors are focused on safety, risk avoidance, investment time horizons, geography, asset type, size and class, credibility of the developer and healthy returns.
• Lenders are focused on the balance sheet, risk-based capital ratios, earnings and quarterly profit and loss reporting. In fact, our experience is that the vast majority of debt restructure workouts are finalized during the last 15 days of a fiscal quarter. In addition, bank officers and special asset managers are driven by job retention and obtaining appropriate data summaries to support negotiated resolutions in asset review committee.
• Outside counsel is focused on carrying out the client’s orders — collecting as much as possible for the lender or paying as little as possible if representing the borrower. This inherent conflict will continue to manifest itself throughout the documentation process, even after there is a verbal agreement or written outline of the restructure settlement terms. For this reason, it is important to keep the debt restructure specialist engaged during the documentation phase to continue to referee the settlement.
• Finally, the debt restructure specialist is motivated to negotiate and mediate an effective and fair resolution. The goal is simple: get to the workout and settlement phase of the conflict as quickly and efficiently as possible while avoiding the unnecessary cost, time and labor associated with most litigation or conflict resolution procedures, or the inaction that often results from self-help remedies.
In addition to accounting for the dynamics of the various players in the debt restructuring process, objective factors need to be taken into consideration in order to achieve a successful resolution. Among the many issues that can arise:
• Whether the debt is recourse or non-recourse. Is the debt personally guaranteed?
• Whether the debt is underwater, and if so, by how much.
• Whether the lender has a true value of the property, such as a recent appraisal.
• The state law debt enforcement procedures. In a judicial foreclosure jurisdiction, the procedure can typically take 12 to 18 months, compared to a trustee sale jurisdiction, where it is 30 to 120 days.
• The type of lender. Is it a regulated entity such as a bank or insurance company, or non-regulated such as a private equity group? Much of the accounting that is required of regulated lenders is absent in a non-regulated environment.
• Disparate financial capacity of multiple guarantors.
• Project quality, geographic location, size and stage of completion.
• The integrity and quality of the borrower, which may lead the lender to perceive that the borrower “won’t pay” vs. “can’t pay.”
• Loan status — current, matured, monetary default, non-monetary default, foreclosure or bankruptcy.
• Single or multiple lenders.
• Organization and record keeping of the borrower.
From the standpoint of a builder or developer, debt restructuring can be a frustrating and emotional process. One minute can bring fear and the feeling of helplessness, and the next a sense of excitement over the possibility of a rescue. In this series of articles, we have discussed the shortcomings of attempting to negotiate on your own behalf, the confrontational nature of employing legal help and the potential benefits of engaging a debt restructure specialist.
We reviewed the debt restructure process itself, its typical length (three to six months) and the exchange of information needed to proceed toward a resolution. We also reviewed the possible outcomes in detail — including loan extensions, A and B note structures, discounted loan purchases, deeds in lieu of foreclosure or title transfers to the lender, and loan collateral liquidation.
Finally, we reviewed actual debt restructure case studies involving builders and developers of varying size and experience; with properties in different geographic locations, having multiple sizes and product types, in various stages of completion; and with several lenders.
From the authors’ view, helping borrowers sleep better at night by providing financial certainty in a highly stressful environment is extremely rewarding. Helping lenders get through the decision-making process in an expedient fashion is also satisfying. We look forward to continuing to do our small part to get this economy back on track, get developers and builders back to work and place serviceable real estate back in the market at right-sized prices.
David McCain and Bill Albers are the principals of MPKA, LLC. They have successfully restructured more than $1 billion worth of home builder and developer debt over the last 24 months.
Contact Claire Spence at 281-359-2127 to schedule a call or meeting with MPKA.