The major banks have invested millions of dollars in marketing campaigns and business models centered around a relationship banking platform. The concept behind structuring a banking business in this manner is simple, a bank can increase their share of wallet by providing more financial services to their client base whilst the client receives a manager who will understand their business and provide efficient turnaround on finance applications.
This model works well when the sun is shining and everything is going well, often these banking relationships will grow across multiple borrowers for business, investment and personal lending requirements. However, as we have addressed previously it can create significant problems when one entity in a group encounters financial distress.
We were recently referred to a husband and wife who had received demands under their personal guarantees requiring payment within 14 days of circa $900,000. These demands rocked our clients as they had no idea there was an issue with the bank.
The referral was received from a solicitor who had reviewed the demand and advised the client that the bank held enforceable guarantees under the loan contracts and documentation. The solicitor is a lateral thinker who understands that commercial outcomes can be achieved and recommended the services of de Jonge Read as being well placed to enter negotiations with the bank.
Our clients had entered a joint venture with a long-term friend and business associate. The business associate had a banking relationship with a major bank and at the time of the application was a highly-valued client, the finance application for the joint venture was approved and all repayments had been made on time.
The business associate had several borrowing entities, one of these borrowing entities suffered a financial setback which resulted in the appointment of a voluntary administrator. All of this occurred unbeknown to our clients.
The joint venture entity did not directly guarantee the entity subject to the voluntary administration appointment, however through the cross-default provisions contained in the terms and conditions of the security documentation all loans in the borrowing group were placed into default and default interest rates applied.
The first step in our strategy was to meet the manager of the financial institution to discuss what had transpired and what the bank was trying to achieve. Interestingly, our client’s facility was not the primary issue for the bank, they were more focused on the assets held by the company subject to the voluntary administration. However, the bank was clear that they were putting all borrowers on notice that if matters did not progress how they desired they would be able to appoint receivers and managers over the assets.
Our client’s business partner proposed to the bank that the lending facilities continue following a successful Deed of Company Arrangement (DOCA) in the company subject to the voluntary administration. The bank rejected this proposal then set a date in which the facilities would terminate if repayment was not achieved. Basically the bank wanted to end the borrowing relationship and exit the group as clients of the bank.
The assets across the borrowing group included development sites, a shopping centre and residential property. The market conditions in the location of the assets was not strong, however there was sufficient value to cover the bank debt but achieving sales in the short term was not a realistic exit.
Our client’s business partner in conjunction with our client approached another bank to seek a refinance, whilst initial indications were that refinance would be approved the loan application was declined.
Our client managed to sell certain parcels of one of the development sites. de Jonge Read were instrumental during this time in keeping regular communications with the bank and advising of updates during the sales period. On the basis that debt was being reduced we could demonstrate the borrowers were being proactive and therefore we were able to agree forbearance terms with the bank for the continuation of the facilities beyond the termination date.
With the debt reduced from the sale of part of the non-income producing property our client and their business partner were then successful in a refinance application and finally managed to refinance away from their bank.
The whole process took many months to play out and required communication and management between our client and their business partner, our business partner’s solicitor, a finance broker, the incoming financial institution and the bank which held security over the group assets.
It has been said that debt can be a great friend but a terrible master. Financial institutions play a critical role in financing the growth of business and the creation of wealth, however, when financial distress occurs a lender will always move to protect their position.
Whilst a good outcome was achieved this case study is an example of a situation that could have been avoided. Quite simply, if our client and their business partner had separated their lenders then the appointment of the voluntary administrator would not have caused the defaults across the entire borrowing group.
A large portion of the senior staff of de Jonge Read are ex-senior business bankers and therefore de Jonge Read are extremely well placed to handle any sort of bank negotiations and work outs.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Call us now on 1300 765 080.