Today, many Scottish SME’s, especially those in the Hotel, Licensed Trade & Restaurant sectors may be having acute problems with their funding. This will be negatively impacting on their ability to grow the business and in some instances, this pressure coupled with a lack of flexibility and liquidity, may be leading their life’s work towards an unwelcome termination.
We see many business owners who are in a distressed space, have battled with their incumbent lender for some 7+ years, only to find that their debt has been sold onto one of the vulture funds with little or no warning. This transfer of debt is typically done to free up capital on the lenders balance sheet and the sale of the debt is completed for a fraction of the original loan sum, normally in the range of 40p – 70p in the pound.
The buyers of these corporate debts are mostly vulture funds and trade under the names Clipper Holdings, CarVal, Cerberus/Promontoria and are frequently managed by UK agents Engage Commercial who will deal with all borrower contact. Once the loan has been acquired by the new fund they are known to apply vast amounts of pressure on the borrower in order to have the debt repaid and make their return on investment. Their focus is on delivery of the maximum quantum, ideally seeking par repayment, with the quickest route to the realisation of that return.
A vulture fund has a single strategy – buy a loan at low price then have it repaid as quickly as possible for a higher amount, at the cost of the borrower, thus creating their profit and return for investors. Where a refinance is not possible or the funders UK based representatives have lost patience or confidence in the borrower, they will not hesitate to take enforcement action. This results in the borrower losing their business, perhaps their family home and being personally sequestrated. The funder will then use the Personal Guarantee provided by the borrower to pursue them for any shortfall from what they have been able to recover vs. the outstanding debt amount. This will happen whether the borrower, knowingly or not, signed up for a Personal Guarantee as part of the funding package when originally taking on the loan.
Time factor is critical to these debt buyers in that, the longer they have the loan on their books, the less profit they are likely to make once refinanced. Thus, the vulture funds pressure the borrower extremely aggressively at the beginning to repay their debt. Often borrowers are put into Administration extremely quickly if a repayment plan is not agreed in time or the borrower or repayment strategy lack credibility.
From our experience the funds, while often pragmatic and keen to strike a deal, care little for the company owner or their family and the impact on the business performance and the borrowers health can be profound.
If you are prepared to think outside the box, there are many new banks out there that have a real desire to assist small businesses in a fairer, open and transparent way. Modernising the commercial lending industry, the new financing options enable transparency from the outset and can put finance in place within remarkable timescales. Pricing can get as low as 2.45%, up to 5 years interest only, over 25 year amortisation period, with loan to values exceeding in some cases 75%.
Conduit Finance always act borrower side to counsel and provide guidance on the best strategy to enable a safe and solvent exit. We call upon many previous transactions and utilise relationships forged with the incumbent funder to ensure the exit is credible and is supported to avert any form of insolvency event.
We take time and care to educate the borrower on the four potential outcomes so they are well briefed and prepared for what the future may hold.
“We found Conduit easy to deal with which is a breath of fresh air. This is the beginning of a long relationship for us.”
To complete a deal often relies on creative thinking and unorthodox problem solving. This covers both the raising of fresh capital to buy out the vulture fund and mediation to enable a deal to be struck that works for the borrower and funder. To make this happen in the real world, an element of debt forgiveness may be required, as invariably the businesses are over geared due to poor lending practices by the Bank who originally provided the loan.
A brief process overview of a transaction will involve us on day 1 relievingpressure from the borrower by fielding all forms of dialog between the two parties. From there we negotiate with the funder to achieve an amicable settlement price and timeline, then enter into a standstill agreement. During this time the funder is not able to enforce against the borrower offering some protection. This is a gradual process and will take time, patience and consistency. We are confident that in most cases we will be able to provide a solution to the borrower. If required, we will source the market to pinpoint a new lender, be that a Challenger Bank, Peer-2-Peer lender or family office, so that the borrower can refinance their debt with confidence and pay off the vulture fund.
2017 is a good year for borrowers with many new banks entering the market. Interest rates remain low and there is more flexibility regarding interest only repayment profiles and longer (20+ years) loan terms.
If you are a Scottish SME business, particularly in the leisure industry, and find your debt has been sold on, then please get in touch.
For borrowers seeking new finance we can provide real time interest rates and figures for your business from our panel of over 300 active lenders.
Call Director, Mark Reidy, on 07775 678 087 or email Mark@ConduitFinance.com.