DELVACCA PRESENTS
What I Wish I Had
Negotiated With The Bank
September 14, 2010
DELVACCA thanks Fellheimer & Eichen, LLP for
their generous sponsorship of this event.
Can you negotiate?
• When the Bank is looking for your
company’s business, it is in sales
mode and will try to accommodate
your requests.
• How much the bank wants your
company’s business determines the
extent to which the Bank will allow
changes to the documents!
© Fellheimer & Eichen LLP 2010
Soooo!
• Here are some things you should try
to negotiate – which will help in the
long run, especially if there is a
problem!
© Fellheimer & Eichen LLP 2010
Do You Really Want That
Swap?
Banks often suggest a “Swap” to “fix”
the interest rate for the term of the loan.
What is a “Swap?”
© Fellheimer & Eichen LLP 2010
A Swap is:
• An agreement totally separate from the
loan agreement
• With its own terms; defaults; and
penalties
• With a different department of the bank or
sometimes a different company all
together
THIS IS A TOTALLY SEPARATE
CONTRACT FROM THE LOAN – IT IS
REALLY AN INVESTMENT SECURITY
© Fellheimer & Eichen LLP 2010
• The Bank will set the interest rate at a
floating rate, most often so many
basis points over LIBOR (London
Interbank Offered Rate)
• The Swap will provide that in lieu of
your paying the floating rate to the
Bank, you will pay the fixed rate set in
the agreement to the Swap Partner
and the Swap Partner will pay to the
bank the floating rate.
© Fellheimer & Eichen LLP 2010
If interest rates go up
• You pay the smaller fixed rate and
the Swap Partner loses money
paying a higher floating rate
• YOU ARE A WINNER
© Fellheimer & Eichen LLP 2010
If interest rates go down
• You pay the larger fixed rate to the
Swap Partner and the Swap Partner
makes money paying a smaller
floating rate to the Bank
• YOU ARE A LOSER
© Fellheimer & Eichen LLP 2010
If for any reason the Swap is
terminated prior to maturity
• You either have a gain or loss
depending on the value of the Swap –
which depends on what has happened
to market interest rates.
© Fellheimer & Eichen LLP 2010
If interest rates went down
since you did the Swap
The value of the Swap has
increased and if you terminate you
owe the difference in value which is
often substantial!
© Fellheimer & Eichen LLP 2010
If interest rates went up
since you did the Swap
You have a gain
IN SHORT
A Swap Is A Volatile Security
You are betting on the interest markets!
© Fellheimer & Eichen LLP 2010
IF
• You fail to make an interest payment
timely
• You default on the loan, even a
technical default
• You need or want to pay the loan in full
prematurely
© Fellheimer & Eichen LLP 2010
The Swap is thereby
terminated
• And, depending on the interest rates
you either owe the Swap Partner or
the Swap Partner owes you!
• At what may be the worst possible
time, your company may have to find a
lot of money to pay the Swap Partner
© Fellheimer & Eichen LLP 2010
• The cost to unwind the Swap could be
more than the balance due on the
loan.
The numbers get real big!
© Fellheimer & Eichen LLP 2010
• Remember – your loan officer
doesn’t work for the Swap Partner
and has no ability to help you.
• The Swap Partner is totally
separate from the lender
© Fellheimer & Eichen LLP 2010
• One client defaulted on a $2.1M loan
and had to pay a $700,000 Swap
unwind fee
• Another had a $7M Swap unwind
fee on a $20M loan
• I took one of those things once and
thought I’d have to pay $1M on a
$5M loan when I sold the property
(fortunately interest rates went up in
the interim and I only had to pay
$350,000 to pay off the loan)
© Fellheimer & Eichen LLP 2010
Does your company really
want to purchase a
speculative security betting
on the interest rate market?
© Fellheimer & Eichen LLP 2010
If Not
• Don’t agree to a Swap
• Take the float
• Rates may go up, but you won’t have
to pay a penalty to get out
© Fellheimer & Eichen LLP 2010
Choice Of Law and Venue
• Seems simple enough – they just put
a clause in the boiler plate saying: X
State’s law applies and/or all disputes
must be resolved in the State and
Federal Courts of Y State.
© Fellheimer & Eichen LLP 2010
Courts Honor Choice Of Law
and Venue Clauses
• Did you know that Pennsylvania courts have
held that if you have a choice of law clause,
that can confer jurisdiction on that state.
Nationwide Mutual Ins. Co. v. West, 2002 PA
Super 282, 807 A.2d 916, 920 (Pa. Super. Ct.
2002). Thus, if the parties have designated a
particular choice of law provision in a contract,
then that should govern. University Mechanical
& Engineering Contractors Inc. v. Ins. Co. of
North America, No. 00-1554, 2002 WL 857105,
*3 (Pa. Com. Pl. May 1, 2002).
© Fellheimer & Eichen LLP 2010
So your company could find
itself having to litigate Far
Far Away (and you won’t
have Shrek or Donkey to
help you)!
© Fellheimer & Eichen LLP 2010
Confessions Of Judgment
In Pennsylvania and Delaware
your Bank’s documents will
likely contain a Confession of
Judgment
© Fellheimer & Eichen LLP 2010
Not a problem in
New Jersey
• There are no confessions
allowed under New Jersey Law
• BUT a Confession obtained
elsewhere in a valid out-of-state
transaction can be domesticated
in New Jersey
• N.J. Stat. § 2A:49A-25 (2010)
© Fellheimer & Eichen LLP 2010
THIS IS A CONFESSION OF JUDGMENT
The Borrower hereby empowers any attorney of any court of record, after the
occurrence of any Event of Default hereunder, to appear for the Borrower and,
with or without complaint filed, confess judgment, or a series of judgments,
against the Borrower in favor of the Bank or any holder hereof for the entire
principal balance of this Note, all accrued interest and all other amounts due
hereunder, together with costs of suit and an attorney's commission of the greater
of 10% of such principal and interest or $1,000 added as a reasonable attorney's
fee, and for doing so, this Note or a copy verified by affidavit shall be a sufficient
warrant. The Borrower hereby forever waives and releases all errors in said
proceedings and all rights of appeal and all relief from any and all appraisement,
stay or exemption laws of any state now in force or hereafter enacted. Interest on
any such judgment shall accrue at the Default Rate. No single exercise of the
foregoing power to confess judgment, or a series of judgments, shall be deemed
to exhaust the power, whether or not any such exercise shall be held by any court
to be invalid, voidable, or void, but the power shall continue undiminished and it
may be exercised from time to time as often as the Bank shall elect until such
time as the Bank shall have received payment in full of the debt, interest and
costs. Notwithstanding the attorney's commission provided for in the preceding
paragraph (which is included in the warrant for purposes of establishing a sum
certain), the amount of attorneys' fees that the Bank may recover from the
Borrower shall not exceed the actual attorneys' fees incurred by the Bank.
© Fellheimer & Eichen LLP 2010
OR TO PUT IT
ANOTHER WAY
It is an agreement that if the
bank decides to sue you – you
agree in advance that YOU
LOSE!
© Fellheimer & Eichen LLP 2010
Asset Based Loans
• Loans where the Bank lends daily
based on asset availability
• Customers are told to pay their
invoices directly to a “lock box”
which really means that all
payments are made to the Bank and
not the vendor/borrower
• A “lockbox” is a euphemism for
paying directly to the Bank
© Fellheimer & Eichen LLP 2010
Asset Based Loans
• Each day’s cash receipts are taken
by the bank and applied to the loan
• You then calculate how much your
company is entitled to borrow based
on a formula
• Generally X% of eligible accounts
plus Y% of eligible inventory
© Fellheimer & Eichen LLP 2010
Potential Problems
• The Bank controls 100% of your
company’s cash
• If there is a dispute with the Bank, the
Bank can shut your company down
immediately by simply withholding
cash
• You are at the absolute mercy of the
Bank!
© Fellheimer & Eichen LLP 2010
Best Protection
Keep a significant amount of cash
available in a place other than the
Bank where you borrow!
© Fellheimer & Eichen LLP 2010
Most Loan Agreements
Prohibit The Maintenance
Of Other Bank Accounts
• Solution – don’t use a bank account
• Use a brokerage account; mutual
fund account or other safe, insured
cash holding vehicle
© Fellheimer & Eichen LLP 2010
Potential Problems
• Ineligible Receivables
• In the fine print of the loan
agreement, ineligible receivables
include
– Receivables to a company that is
more than X days past due on any
receivable to your company
– Or affiliated with a company with
past due receivables
© Fellheimer & Eichen LLP 2010
• Foreign Receivables are
ineligible, unless you negotiate
this issue in advance
• Receivables more than Y days
past due
• Inventory is very limited and
often only includes raw materials
and/or finished goods.
• Work-in process is rarely
included in the formula
© Fellheimer & Eichen LLP 2010
Loan Covenants
The Bank will require covenants
about:
•Debt Service Ratio
•Net Worth
•Equity Capital
•Compensation
•Payments to Vendors
•Capital Purchases
•Loans or Leases from Others
© Fellheimer & Eichen LLP 2010
Negotiating
Financial Covenants
• Have your CFO Prepare a Worst
Case scenario and agree to
75%
of that scenario!!!!
© Fellheimer & Eichen LLP 2010
That Way
• If the Company has an off quarter or
six months
• YOUR COMPANY WON’T DIE
© Fellheimer & Eichen LLP 2010
• ALWAYS DEMAND AND GET
NOTICE OF ANY DEFAULT AND A
REASONABLE OPPORTUNITY TO
CURE
• WITHOUT IT, YOU CAN FIND YOUR
COMPANY WITH AN UNCURABLE
DEFAULT!
© Fellheimer & Eichen LLP 2010
Cross And
Spreader Clauses
• These are clauses that increase the
signor’s liability
And/Or
• Expand the bank’s rights under the
agreement
The Bank Gets
MORE
© Fellheimer & Eichen LLP 2010
Generally Such Clauses
Are Not Highlighted
• Simply lurking in the definitions
© Fellheimer & Eichen LLP 2010
Guaranty of Obligations. The Guarantor hereby guarantees, and becomes surety for,
the prompt payment and performance of all loans, advances, debts, liabilities,
obligations, covenants and duties owing by the Borrower to the Bank, of any kind or
nature, present or future (including any interest accruing thereon after maturity, or
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding relating to the Borrower, whether or
not a claim for post-filing or post-petition interest is allowed in such proceeding),
whether or not evidenced by any note, guaranty or other instrument, whether arising
under any agreement, instrument or document, whether or not for the payment of
money, whether arising by reason of an extension of credit, opening of a letter of
credit, loan, equipment lease or guarantee, under any interest or currency swap,
future, option or other interest rate protection or similar agreement, or in any other
manner, whether arising out of overdrafts on deposit or other accounts or electronic
funds transfers (whether through automated clearing houses or otherwise) or out of
the Bank's non-receipt of or inability to collect funds or otherwise not being made
whole in connection with depository transfer check or other similar arrangements,
whether direct or indirect (including those acquired by assignment or participation),
absolute or contingent, joint or several, due or to become due, now existing or
hereafter arising, and any amendments, extensions, renewals or increases and all
costs and expenses of the Bank incurred in the documentation, negotiation,
modification, enforcement, collection or otherwise in connection with any of the
foregoing, including reasonable attorneys' fees and expenses (hereinafter referred to
collectively as the "Obligations"). If the Borrower defaults under any such
Obligations, the Guarantor will pay the amount due to the Bank.
© Fellheimer & Eichen LLP 2010
Read the Boilerplate
• The Guarantor is guarantying:
• all loans, advances, debts, liabilities,
obligations, covenants and duties
owing by the Borrower to the Bank,
of any kind or nature, present or
future
© Fellheimer & Eichen LLP 2010
Read the Boilerplate
• Under the language in the quoted
document, your guarantor is liable for
virtually anything the Bank wants to
claim
© Fellheimer & Eichen LLP 2010
Read the Boilerplate
Most mortgages say:
“The Borrower/Guarantor/etc. hereby
grants, transfers, enfoefs, etc. as
security for the Obligations. . .”
What is an “Obligation?”
© Fellheimer & Eichen LLP 2010
NOW, THEREFORE, for the purpose of securing the payment and performance
of the following obligations (collectively called the "Obligations"):
(A) the Loan, the Note and all other loans, advances, debts, liabilities,
obligations, covenants and duties owing by the Mortgagor to the Mortgagee
of any kind or nature, present or future (including any interest accruing
thereon after maturity, or after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding relating
to the Mortgagor, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), whether or not evidenced by any
note, guaranty or other instrument, whether arising under any agreement,
instrument or document, whether or not for the payment of money, whether
arising by reason of an extension of credit, opening of a letter of credit, loan,
equipment lease or guarantee, under any interest or currency swap, future,
option or other interest rate protection or similar agreement, or in any other
manner, whether arising out of overdrafts on deposit or other accounts or
electronic funds transfers (whether through automated clearing houses or
otherwise) or out of the Mortgagee's non-receipt of or inability to collect
funds or otherwise not being made whole in connection with depository
transfer check or other similar arrangements, whether direct or indirect
(including those acquired by assignment or participation), absolute or
contingent, joint or several, due or to become due, now existing or hereafter
arising, and any amendments, extensions, renewals or increases and all
costs and expenses of the Mortgagee incurred in the documentation,
negotiation, modification, enforcement, collection or otherwise in connection
with any of the foregoing, including reasonable attorneys' fees and
expenses.
© Fellheimer & Eichen LLP 2010
IN OTHER WORDS
This definition allows the bank to make
demand against the collateral and/or
guarantor for anything the bank can possibly
claim the debtor owes the bank in any
capacity. You think you guaranteed a single
loan and in fact you’ve guaranteed the loan;
the deposit account; other loans; bank’s
checking fees, i.e., each and everything the
lender can possibly think of.
© Fellheimer & Eichen LLP 2010
I am involved in a case right now where the bank has
admittedly been paid in full, every last dime. The company
is in Chapter 7. The bank may have liability for various
WRONGS COMMITTED BY THE BANK for which the
Trustee-In-Bankruptcy is suing for recovery. The Bank is
now trying to claim against the guarantor of the paid off
loan alleging that there was an indemnity clause with this
type of definition of “obligation.” The Bank’s position is that
it is entitled to indemnification if it has to spend money to
defend itself or if it has to pay the Trustee-In-Bankruptcy
because the Bank was found to have violated the law.
© Fellheimer & Eichen LLP 2010
If your company just signs the
“boilerplate” and anything goes
wrong, you and your associates will
find yourselves in a very difficult
position.
© Fellheimer & Eichen LLP 2010
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What I Wish I Had Negotiated With The Bank