Corporate Finance Associates Blog

Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?

The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever.  Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.

It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past.  Three principle areas come to mind:

• Financial covenants associated with a loan
• Personal guarantees
• All Monies clauses

Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility.  When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.

We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.

Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.

Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.

What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower.  In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.

When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.

Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong.  So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all.  As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.

So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!

If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them.

In the pre-Credit Crunch days there were two essential ways to finance a development project, go with a bank who would usually lend up to 65% of the land value and up to 65% of the build costs drawn down in stages as the development progressed, or secondly go with a specialist lender who would lend up to 60% of the Gross Developed Value (GDV), often resulting in less input from the borrower and very often 100% of the build cost covered.

In the former case, it was great if you had the funds, most developers didn’t as their money was still tied up in the last development that was now being sold, in the latter case, these forward thinking lenders made development funding a much easier proposition.

Well we have the Credit Crunch, and a lot of the GDV lenders either closed their books (some of them having Icelandic parentage) or took a step back to see what the market would bring, and the high street banks just refused to sanction new deals at all, but would not announce to the marketplace that they no longer had an appetite for this sector. Out of all this however there remains some specialists who still know what they are doing and can still help with the smaller projects.

We are now 3 years on and after the previous years where large developers were shedding completed stock, by bulk sales or heavy discounts, and closing up other ‘in progress’ sites after making them wind and water tight, we have seen a  return to a low level of ‘normality’, as in certain parts of the country work has started once again in earnest.

The lending climate has changed however, the GDV lenders are few and far between but will look at smaller residential deals (very few lenders at all are looking at commercial builds unless they are either pre-sold or pre-let to a reputable end user) up to say £5m. They limit their total advance to about 50 – 55% of the GDV and expect the developer to exhaust his own funds first before drawing on theirs. Interest rates are higher often as high as 9% p.a. and if the interest is to be rolled into the deal rather than separately serviced, the LTV limit has to allow for payment of these as well.

There is however further light at the end of the tunnel for very sound, house based, development funding in the SE of the country and in certain circumstances for very tasty propositions we can achieve as high as 70% of the GDV.  At this level funds will run out quickly and I would expect these private funds to be very selective in what they wish to support.

The banks are still there in a minor way but are not keen to lend in excess of 50% of the land costs, and a similar amount of the build costs and there will always be the need to jump through an extensive array of ‘hoops’ first, so don’t expect them to be major players for quite a time to come.

If you have a project that would benefit from our input why not give us a call or visit our contact page.

As the UK funding market eases a little more and more businesses who have been biding their time for the last three years are making their funding plans for the future, but wow,  has the market changed or what and the biggest retort we have been hearing over the last few weeks has been – Why so many questions?

Prior to all of the credit crunch challenges kicking off way back in late 2007, we as reputable brokers had a lot of commercial broker wannabes ‘Eating our Lunch’ what with the tick here “just say you can afford it”, “we don’t need accounts with this lender”, “the property prices will go up so no one is really bothered…” market place.  Where have they all gone? – Either out of business or back to their old haunts thankfully and the regime of the specialist business finance broker has returned.

Our clients however still have that old way of thinking and can’t understand why lenders want so much information to support a lending proposition, maybe the drop (from the June 2007 peak) in commercial values by 33% could be part of it, maybe it is the underlying attitude of bankers who are sometimes seen as not wanting to lend, or a raft of other factors.  So I thought I would create this Blog post as some answers and clarification of the current situation.

First off – the old ways are dead and not likely to be revived for an awfully long time.

What do lenders look at, well three distinct areas:

1. Who is the borrower, what is their experience, what is their credit history like, do they have the skills to make this project work

 

2. How will they get repaid, it will either be from the trading income from the business, the sale value if it is a development or the rental income in the case of the investments, and

 

3. What is the security worth, how easily could it be let/sold, or how could the lender get out of it if things ever go wrong.

 

Before late 2007 if no. 3 was attractive enough lenders would lend which is why we saw the proliferation of self certification lenders, where are they now – all gone – there is not one reputable one of them left that operates that way.  The current thinking – if you can’t satisfy no. 2 the case will go nowhere.

Ah yes but what do lenders want here? – They want certainty which was never a given anyway, their way around it now, well they look for stress rate testing (NatWest are stress testing with a base rate of 6% – when was the last time it averaged that?) and this makes a lot of ‘normal’ transactions fall over.

But what if they are happy with that, why all the other questions and information? Perhaps we can look at those:-

CV’s      

They need to know the applicants background and skills that relate to the proposition

Asset & Liability statement         

They need to know what assets you have and how exposed you are to third party lending so everything has to be included

Income & Expenditure statement

If you are living beyond your means (or not actually declaring all of your income) the numbers here won’t add up, and a credit search will quickly reveal whether these numbers are right

Three months personal bank statements (sometimes 6 mths)

How do you manage your personal money, do you keep within agreed facilities, is all your income showing, who are you paying money out to – if you have a credit card payment to a lender that wasn’t recorded on your A&L statement expect questions – do the bank bounce anything – all these and more can be revealed in consecutively numbered (original) bank statements.

Three or six months business bank statements

Much the same as the personal assessment – can you manage your money and does it all show

Three years trading accounts

The big one! – can you pay the lender back based on past history, are the accounts improving or static, how exposed is the business to external lending, what are you paying yourself, and what ISN’T showing and of course how historic these figures are ( if they are over a year out of date expect more questions)!

Whilst this list isn’t exhaustive, trading companies are often asked to provide aged debtor and creditor lists to show how fast you pay your bills and how skilled you are at getting your invoices paid on time – none of this was absolutely necessary with a lot of non conforming lenders in 2007, but it has come as a shock to many that they need them now.

The banks are claiming that they are still lending to viable businesses, but of course that is their assessment of a viable business, how are they ensuring that they don’t lose out?  Well firstly reducing the amount in LTV terms they will lend, by shortening the loans so they amortise faster, by refusing to accept interest only propositions unless the LTV is very low and at the same time charging interest margins and fees twice the level they used to – why because they can.

If your business is now at the stage where you need to be thinking about moving forward, give us a call and we can at least point you in the right direction as to what is possible, why not get in touch by clicking here now.