Tuesday, December 12, 2006

Is Your Lender a Vulture? Three Questions to Ask!

The December 12th Wall Street Journal (subscription required) reported on the front page that cup maker Radnor (owns WinCup and StyroChem) borrowed money from hedge fund Tennenbaum Capital Partners LLC in mid 2005 in order to save itself from its financial difficulties.

Little did they know that less than 18 months later, Tennebaum Capital Partners would be the new owner of the firm.

The Wall Street Journal article goes into great detail as to whether Tennenbaum Capital Partners was a "loan to own" type of lender with critics suggesting that firms like Tennenbaum Capital are "vulture lenders" preying on weak companies by charging high interest rates and swooping in when they fail to repay. Founder Michael Tennenbaum claims the firm never intended to own Radnor and he and his firm are not "vultures".

If you've got access to The Wall Street Journal, you should read the article and reach your own conclusions - I won't do that for you. It's an interesting read if you want to know more about how companies experiencing distress obtain funding.

Here's my point - there's a LOT of money chasing deals. Billions upon billions of dollars. Banks, private equity and hedge funds have more money to lend and invest than at any time I can remember. These lenders and investors are looking for different types of deals all across the risk spectrum. The higher the risk, the more return they expect.

As a recipient of these funds, you need to know the objectives and investing styles of the parties providing the money. While these funding sources will often take weeks (if not months) to complete a due diligence on its investment opportunities, the recipients should be going through the same process in selecting its funding sources.

Here are three questions you might ask to determine if your lender is a vulture...

1. What actions has this lender taken with its other borrowers in the event of a default?

2. Are the proposed covenants tighter than a company can realistically expect to achieve if anything goes wrong with the plan?

3. Is the financing transaction structured in a way that creates a situation in which the new lenders or investors have better claims on a company's assets and income than do existing common shareholders and lenders?

This is a short list - other could be added and I encourage you to leave a comment if you have any other questions that should be added to the list.

The bottom line - the markets are flush with cash ready to be invested and loaned. If you plan to be around for a while, make sure you ask the right questions before you accept.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call.

Related Tags:

No comments: