Authored by Daniel Schweickle (Investment Director, Strategic Capital)
Most brokers spend years building relationships with their clients. Over time, they become more than finance arrangers. They become trusted advisers. Not only are they the first call when a new opportunity arises, but often the first call when something goes wrong.
We regularly work with brokers when things haven’t gone to plan.
A recent situation involved a broker whose client had fallen into default with its existing lender after inadvertently failing to repay their loan at maturity. The broker had arranged a refinance, and the new loan documents had been signed. However, at settlement, the incoming lender was unable to provide funding due to “internal funding constraints” (an issue explored further in When Funding Falls Away At The Last Minute).
The broker understood the business, knew the client well and wanted to help. However, dealing with an incoming lender that had failed to settle – and had consequently caused the client to default – was not part of the broker’s everyday experience.
Situations like this may be uncommon for some brokers, but they are something our team encounters regularly. While every situation is different, the experience reinforced an important lesson: when clients encounter challenges, a broker’s value often extends well beyond arranging orderly refinancings. Their ability to coordinate stakeholders, maintain momentum and help guide a path forward can be critical to achieving a successful outcome.
The broker’s first question: Work with the existing lender or refinance?
The first question is whether the issue can be resolved with the incumbent lender.
In many situations, borrowers will explore whether a commercial solution can be reached with their existing lender. Depending on the circumstances, the lender may be willing to provide additional time, amend facility terms or agree to a pathway back to compliance.
However, that is not always possible.
In this particular situation, the incumbent lender’s initial position was that it was either unable or unwilling to continue supporting the borrower. While discussions with the existing lender remained important, they could not be the only option being pursued.
Recognising this, the broker approached us to determine whether an alternative refinancing solution could be implemented quickly. We were able to provide terms the same day, creating a credible alternative while discussions with the existing lender continued.
How brokers can keep a distressed refinance moving
Once a refinancing process is underway, managing the existing lender becomes critically important. While there is no single approach that works in every situation, there are several factors that can provide confidence to an outgoing lender that a refinance is genuine and achievable. In most cases, that confidence ultimately comes down to credibility.
Secure a credible term sheet that stands up to scrutiny
Every term sheet will contain conditions.
What matters is having a clear pathway to satisfying those conditions and an honest discussion about the likelihood of completion. A credible term sheet demonstrates that a genuine refinancing process is underway and helps provide confidence that repayment can occur within a realistic timeframe.
Often, the incumbent lender will want to see a copy of this term sheet if they are required to provide a short extension to allow a refinance to occur.
Choose a credible lender with distressed refinance experience
Confidence often comes from knowing who the incoming lender is.
Borrowers in default, within a lender’s “bad bank” division or subject to enforcement action often present complexities that do not arise in a standard refinance. An incoming lender with experience in these situations can provide greater certainty to both the borrower and the outgoing lender.
At GCI, many of the opportunities we assess involve borrowers experiencing financial stress, defaults, restructures or other special situations. As a result, we understand the additional challenges that can arise and the importance of moving quickly when a refinancing solution is required. With approximately $250 million of committed capital available, borrowers and incumbent lenders can also take comfort that funding capacity remains available through to settlement.
Build confidence through key refinance milestones
As the old adage says, “Actions speak louder than words.”
A credible term sheet and lender need to deliver an outcome. While the ultimate outcome is the refinance, there are critical steps on that journey:
- Have the borrower and incoming lender actually met in person?
- Has the lender been to site (i.e. the headquarters of the business or inspected the relevant property)?
- Has the lender engaged advisers (such as lawyers) to progress settlement?
- Have formal loan documents been signed?
- What are the conditions to drawing the funds?
The broker is often placed in the position of updating the existing lender on progress. Understanding these critical milestones, and how they are viewed by an incumbent lender, is key to improving the likelihood of a successful refinance.
Key takeaways for brokers managing a client loan default
When a client falls into default, a broker’s role often evolves beyond simply arranging an orderly refinance. They become an important coordinator between borrowers, lawyers, accountants and lenders, helping maintain momentum towards a solution.
Three practical lessons stand out:
- Develop a credible refinancing alternative as early as possible. If discussions with the incumbent lender are unsuccessful, having another pathway already in motion can be critical.
- Focus on credibility. A credible term sheet, a credible lender and visible progress towards settlement all help provide confidence that the refinance is genuine and achievable.
- Keep all stakeholders informed. Brokers are often the conduit between the borrower, incumbent lender and incoming lender. Clear and regular communication can materially improve outcomes.
Most brokers do not regularly operate in distressed situations and don’t need to become restructuring specialists. However, partnering with lenders who have experience in defaults, workouts and special situations can help provide both the borrower and the incumbent lender with greater confidence that a refinancing solution can be achieved.
For brokers, that can make the difference between simply responding to a problem and helping deliver a solution.
For many clients, that’s what a trusted adviser looks like.