Your control of operations depends on your ability to service your debt
The biggest risk of losing control of your property is usually defaulting on your loan and watching the bank appoint administrators or receivers. Not an attractive prospect for a business owner or director.
Where operational property is concerned, for instance in the case of hotels and restaurants, losing the ability to maintain your business operations could be the end of your involvement, and any hope of equity or profit.
Ideally you would maintain control of your property by self-financing or using funds from a benign shareholder who won't insist that its funding be secured. But realistically, the vast majority of hoteliers or hospitality businesses will require an overdraft and term loan, often for significant amounts. Banks and other lenders will insist that loans be secured against the assets, and sometimes also guaranteed; usually by shareholder companies and/or directors.
This will lead to a tension or negotiation between lender and borrower. Of course, there are current market norms for the extent of collateral – security and guarantees – sought by lenders. Risk teams and credit committees go into overdrive. No-one wants to have signed off on one of those rare loans which ends up in default.
Room for negotiation
Yet some banks are more cautions than others; think blue chip clearers versus newer challenger banks. Sometimes established banks have retreated from key sectors, then come under pressure to get back into the marketplace. Challenger banks need customers, publicity and exposure. There can still be competition to lend.
That's where the negotiation comes in. Advisers in this space often say that borrowers give away security too cheaply. It's easy for the banks to send a standard offer letter requiring fixed and floating charges over the whole shooting match: the property company ("Propco"), the operating company ("Opco"); Propco's shares in Opco; wet and dry stock; i.e. everything. So if the evil day comes, and the borrower defaults, the bank can appoint administrators to sell the entire operation as a going concern. The only way to regain control would be to offer to buy the business back. You'd have to offer more than your competitors. And you'd probably need new funding. Given what's just happened, that could be more expensive.
Protecting your future leverage
The better strategy, if it can be achieved, would be to restrict the security offered; for example a debenture from Opco, but not Propco, or a legal mortgage from Propco, but nothing from Opco. This has two potential advantages for the borrower. Firstly, it restricts the lender's ability to pull the entire rug from under your feet. LPA receivers over the property can't sell the pub/hotel business without Opco's cooperation. We've seen lenders miss that previously, Secondly, it lets you keep back some collateral to offer on another occasion, perhaps to secure asset or inventory finance.
Maintaining an open dialogue with your lender
If you can't negotiate your way out of a complete security package, the main focus should be how you communicate with the lender. Stick as rigidly as you can to the financial information covenants, so the bank can see how the business is performing. If a payment is going to be missed or made late, tell them as soon as possible, explain why, with reference to good commercial reasoning such as seasonal trading/one off expenses, and reassure them when you will make up the payment breach, with updated cashflows in support. It often pays to communicate through reputable lawyers known to the bank. In that way standstill agreements can be reached to give time to raise more finance. Covenants can be reset and breaches forgiven. Keeping your bank updated and onside could make the difference between keeping the lights on with you in control, and the lights going out whilst a receiver/administrator takes your place and changes the locks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.