Bill, you are so uninformed about typical credit terms that I simply couldn't let this pass. I am informed: in the course of representing my clients it's not unusual for me to help close or refinance $500,000,000 in loans or more in a year (and this is only a part of my practice). Some of the loans are asset-based, some are not, and some are converted from unsecured to secured during a refinance if a borrower has had any problems at all with ratios or just if the borrower wants to push principal repayments to the back end, which is what TAVA has done with this loan.
I have no personal knowledge about the circumstances of the TAVA loan negotiations, but, based on almost 20 years of representing clients -- some healthy, some not -- in these sorts of transactions, I found nothing in the terms of TAVA's loan that would alarm me as an investor.
FIRST: When a new lender comes in to refinance a secured facility, that lender will always try to piggyback onto the old lender's position, i.e., security.
SECOND: A lender of long-term debt to a borrower that suffered a loss within the previous 5 fiscal years would normally, under good lending practices, need to obtain security for the debt. Such a request wouldn't typically reflect anxiety on the lender's part (rule of thumb: lenders NEVER make new loans to borrowers who make them anxious), but prudence. The fact that the loan is made at all reflects confidence on the lender's part that the loan will be repaid in accordance with its terms.
THIRD: If the borrower's assets are mostly intangibles, such as A/R, intellectual property and service contracts, rather than, say, real estate or manufacturing equipment or finished goods, the lender will typically ask for security on ALL assets, because such assets typically fluctuate from month-to-month and quarter-to-quarter. Again, good lending practices, not extortion; after all, if the lender had to foreclose against the assets to satisfy the loan, the lender could only liquidate assets sufficient to repay the outstanding balance due, plus reasonable expenses. The lender wouldn't get to liquidate ALL the assets, even if it has security in all of them.
Consequently, from the borrower's perspective it doesn't make a whole lot of difference whether the security instrument creating the lien says "ALL A/R, contracts, intellectual property, etc." or "up to $4,000,000 in A/R, etc.", unless the borrowers has plans to take down another loan from another lender and might need to keep some assets unencumbered to offer them to the future lender. As a matter of fact, if current lender and the borrower think they may, in the future, want to restructure the loan, for example, to add a credit line with an increased total principal outstanding, it's much easier and efficient to do that from a documentation standpoint if the original security instrument was broad enough to encompass additional credit.
FOURTH: SBA (Small Business Administration) loans typically carry a much higher interest rate not only because the borrowers may be smaller, less liquid and/or have a less than stellar financial history, but also because the loans are too small to syndicate, so one lender has to carry the entire risk for that borrower. Large to medium borrowers with unblemished credit histories typically pay 1 to 1 1/2 points over prime which, at today's prime rate, would put a typical coupon at 9.5-10%. If the loan were a balloon, with all principal repayments deferred until the due date, the interest rate would probably ratchet up another 75 basis point at least, to reflect the increased cost and risk to the lender of keeping that much money out there for the full term of the loan.
CONCLUSION: I fail to understand your basis for characterizing this loan as "loan shark" quality.
Bill, I just don't think you get around the corporate credit markets enough to offer the rest of us an informed analysis of this transaction. Just a personal observation -- no insult intended.
Cathleen |
