Distressed Assets

The security review is a crucial part of any lender's strategy to recover money from a defaulting borrower. It's a document created by a legal representative, separate from the original legal team, after a thorough analysis of the existing loan and security details.

Such reports are often necessary when lenders need to take legal action against a borrower who has defaulted on their payment terms. A Security Review provides a comprehensive evaluation of the lender's security interests, including their perfection and priority.

The security review process helps the lender identify any issues with the loan documents early on and determine how they will interact with the borrower and other involved parties.

It involves examining various documents and registrations to assess the enforceability of security and guarantees. These include the loan document, related amendments, reservations of rights, security documents, guarantees, and associated documents. The review also considers the borrower entities' corporate authorizations, company constitutions, inter-creditor deeds, deeds of postponement, deeds of priority, and similar documents. Additionally, quasi-security documents like collateral warranties and public registries such as Companies House and the Land Registry are assessed.

After the review, a report is created summarizing any issues found and providing commentary on the enforceability of the security and guarantees. The report also offers advice on potential process-related issues during enforcement.

At Newmanor Law, we possess the knowledge and experience to guide and support clients through the challenges faced by lenders, borrowers, and other stakeholders in the commercial property sector. Our firm has successfully navigated complexities resulting from economic or market downturns on behalf of many valued clients.

By selecting Newmanor Law for your Security Review, you can have confidence that we possess the comprehensive skillset to meet your exacting requirements in a clear  and straightforward manner.

A covenant breach can have various implications, including financial concerns like debt payment and continuity of supply. Engaging with stakeholders early on can help mitigate these risks and stabilise the situation.

Default consequences may involve penalties, cancellation of commitments, acceleration of repayment, and enforcement of security. However, minor breaches may be rectifiable within a grace period.

Newmanor Law offers comprehensive reviews of facility and security documentation to assess their effectiveness. Default in one finance line may impact other lines and related contracts. Therefore, conducting a thorough contract review and seeking advice on matters like directors’ duties and options planning is advisable.

Be mindful that when relationships are strong, a covenant waiver or temporary moderation, along with potential funding assistance, can be considered, which is something else Newmanor Law can support with.

A “reservation of rights” letter usually describes the specifics of a default, the events that led up to it, and the facility agreement clause that was broken.

A lender may use this mechanism to protect its rights under the facility agreement while simultaneously asserting its rights against the borrower after suffering detriment as a result of the borrower’s false claims (estoppel).

The letter clarifies that there has been no waiver of the event of default and that the lender is reserving all of their rights or remedies under the facility agreement.

Newmanor Law are experienced in managing the processes surrounding the default, draft and execution of reservation of rights letters to ensure lender clients do not incur any additional financial hardships upon a project being deemed distressed.

It is advisable for a lender in a real estate transaction to consider various enforcement options. Factors such as the economic realities of the transaction, the security package, the applicable legal framework, and the jurisdiction of the borrower and property should be evaluated.

This assessment will help determine the most viable enforcement route to maximise recoveries. Before resorting to enforcement, lenders typically explore restructuring options, granting standstills, extending loan terms, or agreeing to other amendments.

Receivership is a straightforward enforcement method, particularly for single assets or properties. However, for more complex financing deals, an administrator may be preferred.

If the asset involves an operating business, a receiver’s powers may be more limited compared to an administrator. In cases where qualifying floating charges exist, the lender can appoint an administrator, allowing all assets (not just the property) to be realised.

It is crucial to engage a real estate professional, either as a receiver or alongside an administrator, who possesses the necessary skills in dealing with the property. Newmanor Law specialises in real estate matters and can provide expert support in such instances. With our focused experience and knowledge, we ensure swift and effective enforcement measures are implemented for optimal outcomes benefiting our clients.

A discounted payoff (DPO) can be one solution where there is distressed debt, but for lenders in particular, it will be crucial to exhaust all other possibilities first. In certain cases, a DPO may even form part of a bankruptcy court settlement, where a final agreement is reached for a payoff amount below the total obligation.

In distressed debt DPOs, the lender incurs a loss equal to the contracted debt and interest that the borrower is no longer obliged to pay. Nevertheless, with an asset-backed loan DPO, the lender may agree to a discounted payoff while retaining the right to seize the underlying asset. This could potentially result in breaking even or minimising losses due to the disparity between the equity value and payoff value of the levied asset.

Although DPOs can help avoid bankruptcy, they may have long-term negative impacts on credit and generally involve more expensive debt settlement fees. As such, it is always advisable to seek specialised financial and legal advice to determine the viability of this solution in specific circumstances before proceeding.

Creditors’ actions are constrained by the terms of any intercreditor agreement and it’s crucial for lenders to take advice on what they can and can’t do. It establishes the framework for the rights and interests of creditors, particularly in the event that a borrower's financial condition worsens and a default event is brought about.

Without such a document, conflicts may arise if each party exercises their rights simultaneously. This agreement defines and safeguards the interests of each creditor ahead of any such scenario.

At Newmanor, we work closely with lenders, lead arrangers or agents to draft and amend Intercreditor Agreements on behalf of the creditors, and have extensive experience in managing complex arrangements involving multiple creditors, working alongside senior lenders and all other relevant legal counsel to create well-considered and robust agreements to best suit the needs of all parties concerned.

The disposal of distressed assets is all about understanding the inherent value and structure to assess value. Key considerations when disposing of distressed assets include:

• Valuation: The seller aims for the highest price, while the buyer negotiates for the lowest. Auction sales are common to crystallise value.
• Structure: Determining the structure of the sale and purchase.
• Purchase Agreement Issues: Unique questions arise for the sale of a distressed company.
• Employment and Non-Compete Agreements: Owners may want to sell but continue being employed; creditors may want to exit the existing owners.
• Bankruptcy Purchases: Buying through bankruptcy offers additional buyer benefits.

Those seeking to dispose of distressed assets can rely on Newmanor Law for a sales process that addresses cash flow and debt repayment, with a thorough financial analysis and asset valuation.

When a company or individual fails to meet the loan agreement terms the fixed charge holder can take action to recover funds. This involves appointing an LPA Receiver under section 109 of the Law of Property Act ("LPA") to manage or sell the property.

An LPA Receiver acts on behalf of the lender, taking control of the secured asset and facilitating communication between the parties. The steps taken by a receiver to recover debts may include securing and insuring the property, taking possession, managing rent payments, diverting rental income, minimising losses, arranging property sale, and distributing proceeds to relevant parties.

While anyone can be appointed as an LPA Receiver, they are often licensed insolvency practitioners and surveyors. Newmanor Law has expertise in appointing and working with LPA receivers and administrators, ensuring knowledgeable and experienced individuals are involved while maintaining a smooth and efficient enforcement process.

Buying distressed assets and property from an LPA receiver may attract investors due to competitive prices, but there are risks involved:

• No title guarantee: The receiver cannot provide any title guarantee, so a full title review and property inspection are recommended. Indemnity insurance can also help mitigate remaining risks.

• No replies to enquiries: The receiver has no personal knowledge of the property and will not provide replies or warranties. Conducting searches, hiring a surveyor, inspecting the property, and getting all risks indemnity insurance can help mitigate this risk.

• Validity of receiver's appointment: The appointment of a receiver must be valid for the sale contract to be enforceable. It is advisable for buyers to consult an insolvency lawyer to be sure of this. Lenders may also require confirmations regarding the appointment in the Certificate of Title. The Land Registry usually requires certified copies of the receiver's appointment documents for transfer registration.

• A receiver has no personal liability: It is advisable to have a simultaneous exchange and completion instead of a gap because a receiver has no personal liability under a sale contract. The appointment documents required by the Land Registry should be provided before exchange or an undertaking should be given to provide them on completion. Push for an undertaking from the receiver's solicitors to assist with any requisitions raised by the Land Registry about the receiver's appointment.

Newmanor Law has extensive experience supporting such transactions and is adept at navigating such risks, to ensure that all facets of the purchasing processing are overseen with an exceptional attention to detail.

To increase the likelihood of success when a restructuring plan is being implemented, effective advice should focus on the following points:

• Focus on relevant information for decision-making.
• Provide transparency in analysing the company's present position and identifying obstacles to restructuring.
• Clearly state the strategic focus of the plan to make the company viable.
• Emphasise action by outlining a central program of measures.
• Summarise results and impact in an integrated, stress-tested business plan.
• Plans should be practical, achievable within the timeframe, and based on realistic objectives.

Effective restructuring requires capable, experienced advisors, and Newmanor Law is able to provide such a service in the implementation of the finance, real estate and construction elements of a restructuring plan. Key factors include involving stakeholders, ensuring transparency, and regaining trust and security. Focusing on essential survival issues and realistic measures in the plan increases the likelihood of success.

Renegotiating contracts on distressed assets can be challenging. The seller will be facing financial difficulties that are forcing them to sell their asset, and often at a discount.

Newmanor’s role is to find a quick solution that benefits both parties, while also securing the best deal possible in the circumstances.

For us, it's important to find a solution that addresses our client’s goals, not to take advantage of the situation, but rather help them solve their problem.

We understand the need to be flexible and creative in finding ways to overcome any obstacles or objections that may arise during the negotiations. For example, sellers of distressed assets may have unrealistic expectations, legal issues, tax liens, or other complications that can make the deal more difficult or risky.

We are adept at working through such complications with empathy and cohesion, devising alternative solutions if needed, and finding creative ways to add value and ease the transition.

It's crucial to communicate clearly and frequently throughout the negotiation process, especially because of the sensitive, often fraught nature of distressed asset deals.

Excellent client communication forms part of our core values at Newmanor Law. We push deals forward and tell you what we have done and when, so you always know the progress of each deal. We use simple and positive language, and avoid jargon at each stage as we find this instils confidence that our team is doing everything possible to ensure transactions run smoothly.

Importantly, we operate on a strictly fixed fee basis, meaning that the costs we agree up front are the costs you pay. This will include managing any last-minute issues or changes in circumstance that may occur.

Debt restructuring can offer lenders a better recovery than for financially troubled debtors. It benefits both borrowers and lenders by reducing interest rates, extending payment deadlines, or both. This improves the company's ability to pay its obligations and stay operational, as creditors understand they would receive less in bankruptcy or liquidation. It's a win-win situation where the business avoids bankruptcy and lenders typically recover more than in bankruptcy. The key stages of debt restructuring include creditor standstill agreements, valuation and viability assessment, and signing and implementing the restructuring agreement.

Debt restructurings involve various approaches:

• Covenant waiver and reset: When a borrower shows signs of distress and breaches covenant, debt providers may agree to waive it temporarily or buy time before extensive restructuring.
• Debt rescheduling: Parties may agree to reschedule existing debt by adjusting repayment profile, such as providing a capital repayment holiday or extending the loan's maturity date.
• New debt injection: A supportive lender may provide new funds, waive existing debt, or accrued interest if a borrower presents a clear plan and strong supporting argument.
• Refinancing by new lenders: If the existing lender is unwilling to restructure or stakeholders find it unpalatable, another lender may step in to support the business's restructuring plan.
• Breakup/sale of non-core assets: A borrower can sell non-core assets to pay down its debt, with secured lender consent. Equity stakeholders retain their share but debt: equity ratio shifts.
• New equity injection/recapitalisation: Borrowers facing financial difficulty can raise additional equity to fund the business through a downturn when it's believed to be fundamentally viable but temporarily impacted. Equity stakeholders may retain a share in a smaller borrower, altering the debt: equity ratio.
• Debt-for-equity swap: Financial creditors receive shares in the restructured borrower in return for reducing/cancelling debt claims. This reduces the borrower's liabilities and allows lenders to benefit from future profits/dividends or a sale.
• Transfer to Newco: Debt and equity stakeholders can transfer the borrower's good assets/business to a newly-formed company (Newco). Financial creditors may receive debt, equity, or both in Newco. Careful execution is needed due to insolvency laws.