Are we facing the lost decade for middle market.
Over the last few weeks three distinct situations have come to my attention. All three have the same underlying issues; loans classified as current with much too much gray hair.
- A real estate project is poorly managed and cannot make its loan payments
- Potential buyer uncovers a secured lien from a large bank with no payments in five years
- Bank asks customer to engage a professional to provide guidance on improving cash flow and operations
The common thread through all the loans is that they are classified as current. Let’s take a quick look at the three situations.
- In “1” the international bank engaged a colleague not as a turnaround / restructuring expert but as a knowledgeable person in the specific market. The bank has been rewriting the note with ever increasing values to cover unpaid interest and roll it baby roll it.
- In “2” the potential buyer finds out the undisclosed note is classified as current by the bank even though no payments have occurred in five years. This company is marginally profitable but cannot meet debt obligations.
- In “3” this large bank at least recognizes the issues. The customer’s response is that he will wait out the economy and then goes out and gets term sheets to take out the old bank. The closing costs and increased interest costs will fare exceed the professional fees in all likelihood.
This is an all too familiar story most of us hear over and over. When does this Merry Go Round end? Hopefully better than the bankruptcy of Merry Go Round in 1996.
I see some good news in the stories.
- The real estate lender is at least starting to take a serious look at alternatives other than rewrite it and roll it forward.
- The seller is passing the baton to new owners with capital to invest in this failing enterprise. The funny part is the seller was looking for 10 times adjusted EBITDA. I think the key word is adjusted.
- While the company is in denial / waiting for revenue rebound and the new lender puts heavy emphasis on the rising economy, ever so slight that it is, will make everything okay. We all know the story all too well. We just need a little more revenue.
Two of the cases reflect total denial by the lenders. Maybe denial is the wrong word as they may understand but cannot and will not reserve the loans. They need to keep them on the books to meet budgetary demands from up high. In the third case we have good news and the good news really is starting to take hold. Liquidity is strong and several new tier two / three lenders and entering the local and national market.
In all three cases the pressure to keep or write new business requires a blind eye to solving the underlying business issues. In my opinion, until the universal WE starts to fix the underlying business issues, many businesses will remain languishing impairing job growth and the economy. It took Japan, what is it, 20 years and a nuclear disaster to start its economy growing?
Let’s not make this the lost decade for middle market companies.