In Part I of our series, we discussed the current market trends, new legislation and reality of another potential real estate/hospitality down cycle, though not as severe as in 2008. In Part II, we showcased the issues we see when working with distressed situations and how they can drastically change the outcome. In our final part, we discuss guaranties and their impact on a successful restructuring.

Guaranties

Analyzing guaranties, personal or corporate, as well as their collectability is crucial in analyzing restructuring options. Without personal guaranties in place, negotiations can begin from a position of strength. With personal or collectible corporate guaranties in place, detailed analysis is crucial to a negotiated outcome.

A common issue encountered occurs when a property has more debt than it can support and more than it is worth. The principal may only be one of the guarantors in the real estate venture. When projects require additional capital infusions, negotiations around the guaranties become more complex. Principals, investors and mezzanine lenders frequently are not aligned with respect to their own economic interests.

Asset values can generally be established within a reasonable range, and therefore the guaranty can become a significant factor impacting the ultimate economic resolution. The debtor may be only one of the decision makers in resolving the issues. Other guarantors may have different legal and financial considerations and may have retained their own legal counsel. Depending on the relative strength of the guarantors, the debtor may or may not have a real negotiating position. The situation can further be complicated when the debtor, generally a single purpose entity, has both corporate and personal guaranties, often with many of the same key principals with a financial interest in both.

Regardless of the ownership structure (single purpose or holding company), there may not be a creative restructuring plan that will change the asset value materially in the short-term (two to three years). If the value of the property is less than the debt, the lender is effectively in the equity position. When principal's equity is out of the money, there generally are two different scenarios to deal with: properties with some collectible recourse debt and those with nonrecourse debt.

It may become apparent to the beneficiaries of the guaranty from the situations listed below that the guaranty may have impaired value:

• Lack of collectability, including situations where litigation costs exceed potential recovery.
• An agent bank, leading multiple syndicates (with different syndicate partners), may find that that there is a conflict of interest among their syndicate members.
• An agent bank of one syndicate may be a participant in other syndicates holding a common guaranty, causing a similar conflict of interest.
• An agent bank may have other (nonsyndicated) loans to the guarantor and may not wish to aggressively pursue the guaranty.

What the legal and financial advisers need to do:

• Determine the realistic value of all of the properties owned by the guarantors.
• Review each of the guaranties to understand any nuances or differences.
• Educate the lenders on the limited value of the guaranty.
• Consider the structure and composition of the lending syndicates.
• Emphasize to all stakeholders that a consensual plan will likely maximize their value.
• Advise all parties that any single guaranty holder can start a rush to litigation.
• Lead negotiations that will result in a global settlement of all guaranty issues.
• Educate the guarantors on the complexity and timing required to reach a global consensual deal. |
  1. Advising clients often requires a steady approach and calming influence. Often the principal has not come to grips with the declines in value of their asset or they do not have the patience for a long or contentious global consensual workout.
  2. Advisers should also educate the lenders, as they may also have trouble accepting the declines in values and the resulting losses they will experience.

Legal and financial advisers must collaborate and “be on the same page” with respect to the realistic alternatives, otherwise clients will gravitate towards the adviser advocating the more optimistic sounding alternative.

In summary, the following steps are often crucial when analyzing restructuring options and the impact of guaranties on them.

• Perform a thorough legal analysis of all guaranty related documents. Attention should be paid to any ambiguities or errors among the documents.
• Perform a realistic analysis of the values of underlying assets. Old industry rules of thumb may no longer apply and do not expect the “good old days” to return quickly.
• Use realistic discounts for illiquidity due to cost of financing, limited buyers and legal entanglements.
• Determine the dilution of value due to the number of parties with guaranties. If there are many slices of the pie, each slice may be too small to chase.
• Calculate the costs of litigation or bankruptcy and educate creditors on how this could impact their potential recoveries.

Achieving the best possible restructuring outcome requires early action, realistic expectations and a detailed understanding of the negotiating landscape, particularly the impact of the guaranty structure.

Troy Taylor is president and Paul Rubin is managing director of the Algon Group, a financial advisory firm that provides restructuring and M&A services. The Algon team has successfully handled many high-profile and complex real estate and hospitality restructurings in South Florida including those that came about from the 2008 Great Recession. They can be reached at [email protected] and [email protected] or www.algongroup.com.