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Debt or equity: in difficult economic times, background investigations may be your best protcol | By Jerry Oldham |
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In the best of times, a thorough background investigation on the company
and the management team of the borrowing entity or investment
prospect is prudent due diligence. In these days of increased economic
uncertainty and deteriorating balance sheets, it may be the time for lenders and investors to make it their best protocol that due diligence requires assessing thoroughly the backgrounds of the management team or the company that they are relying upon to repay a loan or manage an investment. The old adage ‘it is the management team that repays the loan’ has never been more accurate. Those with a new loan prospect, investment opportunity, portfolio loans or investment assets that are described by one of the following characteristics, may consider it timely to perform new background investigations or to update current background investigations and related due diligence. It is beyond a reasonable ‘safe harbour’ holding period timeframe since the original loan or investment was made. The background characteristics of the subject(s) of the original investigation may have changed since inception. The nature of the asset (i.e., whether a loan, a portfolio investment or business purchase) and the lender’s/investor’s preferences, risk tolerance or policy with regard to this holding period risk will determine an appropriate timeframe for again performing background investigations on the relevant parties. Absent a compelling reason to otherwise update them sooner, in these times of economic uncertainty, an appropriate holding period by which to update the background investigations, in our opinion, is one year. You are financing or investing in industries that, during this economic downturn, are more susceptible or vulnerable to asset value and cash flow fluctuations. Certain industries are being impacted to a greater extent than others during these difficult times. In the US, the automotive industry and certain ancillary industries are examples of this. The current economy can also have a very negative impact on the ‘other investments’ of your borrowers or stakeholders that may be involved in adversely affected industries. The resulting stress can directly or indirectly impact your borrowers or investments, the result being the usurpation of managements’ time and/or money from the businesses that you have financed or invested in. Your loans or investments are beginning to show stress because of slow sales, inventory turns, accounts receivable collections or other tendencies that indicate a change from a normal business profile. Regardless of the industry, the resulting stress from the above that is brought upon the management or owners of the company that you are a creditor to, or investor in, can have a direct or indirect and negative impact on your loan or investment because of the usurpation of time and/or money by the management or owners from the business. As is said, ‘desperate people do |
desperate things’, and the management team of your loan or investment may not be the exception.
Your borrowers or investments are owned by individuals or entities that are involved in multiple businesses in diverse industries across diverse geographic boundaries. Multiple investments by the management or owners of the companies that you are a creditor to or investor in, especially across diverse industries and geographies (whether domestic or foreign), can put extra financial stress on your loans or investments in these tough economic times because of the usurpation of time and/or money by the management and/or owners of the companies in which you have made a loan or investment. As they say ‘time is money’, and, if the management or owners of the borrowing entity or investment in which you are involved are also consumed with another business in crisis, then that crisis will likely impact your situation as well, whether directly or indirectly. The sooner you know if this is true, the better your outcome will probably be. There has been a change in management or control of the business since inception of your loan or investment. The backgrounds of the current management team and/or owners likely have never been investigated, and, if they have, the investigations may not have been performed up to your standards. A new management team may bring new baggage to your loan or investment. This risk can also come with an acquisition by your portfolio borrower or investment. Simply put, if a background investigation has not been performed as an aspect of your expanded due diligence, then the time is now to complete the task. You are involved in a workout or restructure of a loan or investment. In this instance many changes may have occurred in the background of the management team, or owners or asset composition of your loan or investment since inception. The result could lead to a serious compromise in your negotiating position or your loan or investment structure. Therefore, now is the time (i) to perform an asset search in order to determine if assets have been compromised or moved to the detriment of your loan agreements, collateral or investment position, and/or (ii) to perform a background investigation to determine if the managers or owners are involved in other businesses that may be attracting their time and/or capital, adverse to your interests. In summary, the advancement of time and the changes in the economy and management and business owners’ circumstances may bring with it indicators or predictors of nefarious activities that could impact your loan or investment. If any of the above characteristics fit your current situation then a background investigation and/or an asset search may be your best protocol. Jerry Oldham is the Chairman and Chief Executive Officer of 1stWEST Financial Corporation. He can be contacted on +(303) 670-3443 or by email: j.oldham@1stwest.com |
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REPRINT | FW August 2009 | www.financierworldwide.com |
This article first appeared in Financier World's August 2009 Issue. ©2009 Financier Worldwide Limited. Permission to use this reprint has been granted by the publisher. For further information on Financier Worldwide and its publications, please contact James Lowe on +44 (0) 845 345 0456 or by email: james.lowe@financierworldwide.com. |
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