effort. This yields a self-reinforcing cycle
in which buyers aren’t as aggressive
on price as they otherwise might be,
which confirms the seller’s inclination
to hold out to see if things get better.
Unfortunately, they often don’t.
The “Pull” of Bankruptcy. The window
to exit a credit prior to bankruptcy
does not run all the way up to the day
of filing. As a company’s performance
deteriorates and the prospect of a
bankruptcy becomes increasingly
likely, potential buyers at some point
back away to await the free and clear
auction to come. Once a company gets
trapped by the gravitational pull of a
bankruptcy “black hole,” there’s nothing
to be done until it comes out the other
side. Potential sellers who engage
in brinksmanship on troubled loans
often find a dearth of buyers once the
bankruptcy process becomes imminent.
Prior to opening the North Carolina office for Sandton
Capital, Robert Orr was part of the 2005 founding
team at the de novo Square 1 Bank, where he held
a variety of general management and corporate
development roles in growing that institution to
more than $1 billion in assets. Prior to that, he was
a management consultant, most recently with
The Monitor Group. At Monitor, he had extensive
experience advising financial institutions and
other large corporate clients on growth strategies.
He holds an MBA from the Stanford Graduate
School of Business and a bachelor’s degree from
University of North Carolina (Chapel Hill).
to grave can get in the way of value-maximizing exit opportunities earlier in
the process. While it is always difficult
to compare a realized outcome to the
path not taken, the proper criteria for
judging a workout should be what is
recovered—not how it is recovered.
Need for Closure. Whether from an
admirable sense of optimism or a grim
determination to see things through,
many creditors are unwilling to part
with a troubled loan until the final
decree comes down. The mentality
that credits should be held from cradle
Increasing Comfort Levels
Selling a troubled credit is never an easy
process, and every penny of haircut
hurts. But as savvy sellers know, there
are many credits for which the first
loss is the best loss. Identifying which
credits those might be and committing
to an exit process early enough to
effectuate a transaction provides an
important tool to the workout process.
For buyers with the appetite and ability
to underwrite all three of Rumsfeld’s
categories of information, there
are many opportunities to make
appropriately risk-adjusted returns.
These opportunities are likely to
increase over time as both sellers and
buyers grow increasingly comfortable
with prebankruptcy credit sales. J
1 For the purposes of this article, the focus is on
contested / difficult distressed credit situations.
In cases in which borrowers are cooperating
with their lenders, there are a variety of
attractive exit paths—for example, Article 9
sales. Unfortunately, such options are rarely
available to lenders when the relationship sours.
New Education System Launches
with Bankruptcy Litigation Course
TMA’s highly-anticipated new education system launches this spring
with the Bankruptcy Litigation as a Strategic Tool course. Restructuring
consultants, financial advisors, attorneys, and non-attorney service
providers will find this comprehensive course invaluable as it addresses
key issues from valuation practices to evidence rules to licensees of
technology and much more.