Wednesday, August 12, 2009

Vulture Lenders Are Back!

Vulture lending is back according to The Wall Street Journal (subscription required). New data from Dealogic pointing to 140 distressed debt deals valued at over $84 billion in which creditors used their debt positions to seize control of troubled companies.

The deals cited included corporate takeovers resulting from bankruptcies, restructurings, recapitalizations or liquidations.

The front page article suggests that many of today's vulture lenders are hedge funds who are increasingly thinking about a "loan to own" strategy. However, it is hard to know if the hedge fund lenders in these corporate takeovers were merely executing upon one of their exit strategies to recover their loan balances or if their original intent was to own the company.

In late 2006, I provided a few tips on how to identify if your lender is a vulture. If your considering new lenders, it's a good time to revisit those tips. If you've already got lenders who are beginning to act suspiciously, it's probably too late to do anything about it.

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?

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

Tags : vulture lender , distressed debt , loan to own , business loans , cash flow problems

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