Five Deadly Sins of Financially Distressed Builders
By Troy Taylor, Larry Comegys and Travis Hendren, The Algon Group
Unless you are one of the few well-capitalized builders or developers who have been able to sit on the sidelines and ride out the worst of the recession and housing downturn, you’ve had to make some very difficult decisions to save your business. And you still have more to face.
Given today’s economic climate — and because there are few, if any, good options out there — you should focus on achieving what we call the “least-worst” solutions that are available to you.
We have all seen or heard about how otherwise well-managed companies made business and financial decisions that resulted in the worst financial outcome possible during these stressful economic times. However, there are some things you can begin to do now that can help guide you toward making decisions that will result in better outcomes.
But first, you will have to steer clear of what we call the “Five Deadly Sins of Financially Distressed Builder/Developers.” If any of them apply to you or your business, take action now to purge yourself of the applicable sins:
- Not Being Proactive
Doing nothing except waiting for the market to correct itself is a sure-fire strategy for achieving financial ruin. Every month that you wait wastes precious resources that you will need to create a real solution.
- Putting Good Money After Bad
Your bank or lender will use every trick in the book to get you to commit what cash you have toward carrying their loans. Normally this is the right thing to do, but these aren’t normal times. So, and this is crucial to your decision-making, if the “real” market value of the encumbered assets is less than the debt basis, then your bank owns the assets because your equity is gone. In this situation, if you accede to your lender’s wishes and commit more cash toward the loan, you’re just throwing your money away.
- Unjustified Optimism
Believing that the housing recovery is just around the corner is too risky and dangerous a turnaround plan to rely upon. Many banks still have not written down or cleaned up bad residential loan portfolios. Stop believing and think about what will happen when those foreclosed assets hit the market.
- Wasting Time, Money and Effort Negotiating Short-Term Fixes
Forbearance agreements are, in many cases, a waste of time and only serve to keep the lawyers busy. More than likely, the net result of these short-term fixes is that you’ll end up giving up your legal rights and the bank will give you little of value. Instead, when negotiating a solution with your banks, negotiate a complete restructuring of your balance sheet, debt or even how your business is organized that will permit you to realistically run your business profitably. Negotiating anything less means that you are essentially working for your bank for free, so you’d be better off walking away from the table and going home.
- Thinking That You Can Restructure Your Business Yourself
Trying to get restructure you loans, debt or your business by yourself or with your local CPA or corporate attorney is a prescription for disaster. Your plate is already full just trying to tread water. Instead, hire restructuring professionals who know what the banks and lenders really can or cannot accept. Hiring professionals sends a message to your creditors that they will be facing a serious situation, and it insulates you from unpleasant discussions while enabling you to maintain a future business relationship with your lender. Having a seasoned bankruptcy attorney and financial advisor on your team may seem expensive, but the cost will be a fraction of potential losses and it may save your business and protect your family. The fact that bankruptcy can be worse for the bank than the debtor is an important negotiating tool.
Business Realities You Need to Accept
Once you have jettisoned any or all of the above bad-for-your-business habits that you may have accrued during the downturn, it’s time to accept a few market and business realities.
If you want to be in position to take advantage of the opportunities that will eventually reappear, you will have to make informed decisions based upon a very difficult set of facts and business realities:
- Your bank is not your friend. It’s a business that is probably also trying to survive. Long-term relationships mean very little and your banker will do what he believes is in the bank’s economic interest.
- Your assets are probably worth less than the associated debt. If assets worth $10 million today are encumbered with $20 million in debt and you work for 24 months to recover $15 million for the bank, the bank will not pay you to get them the additional $5 million — unless you make that deal today.
- Cash is king. Don’t waste it by paying interest or principal without agreeing to a global restructuring plan. Do not give any additional cash or pledge additional collateral to your bank without a global restructuring plan.
- Engage legal counsel to analyze any guaranties — either personal or corporate — as well as their “collectability.” If you don’t have any personal guaranties, good, you are in control. Now start to act like it.
If you do have personal or corporate guaranties, come to an agreement with all of your lenders simultaneously, not just the one with the squeakiest wheel.
- Like 99% of your home builder/developer compatriots, you probably don’t have the experience, expertise or time to negotiate with your lenders, given the rapidly changing market dynamics.
- No new outside debt or equity is available without a balance sheet reflecting assets at realistic, sustainable values.
- A Chapter 7 or 11 filing may or may not be necessary — but preparing for it may be very helpful when negotiating with your banks.
- If you act in an honest and ethical manner, you will probably have fewer long-term consequences with the lending community, even if things get ugly. Your advisors can and should shield you.
Completing any type of meaningful restructuring will take time and will be expensive. Accept these facts and prepare for them.
What You Need to Do
Now that you have a realistic idea of what you are facing, you can take appropriate and intelligent action:
- Immediately hire legal and financial advisors who understand how the game is played. Hire the best you can afford.
- Review your personal financial planning with your legal advisors in order to determine which personal and business assets are protected and which are at risk.
- Work with your financial advisors to analyze how much your assets are worth to your bank, not to you.
Work with both your legal and financial advisors to develop an overall comprehensive plan that addresses the entire debt structure as well as your guaranties. Don’t expect your banks to help you develop this plan. Their interests are different than yours. Be prepared to change your plan numerous times during the process.
- Present a fully analyzed and documented plan to your lenders that they can take back to their internal decision-makers. Your banker does not have the time, motivation or resources to do this on your behalf. If you give your bank a professionally prepared plan — with the proper packaging, analysis and documentation — you will greatly improve your chances of approval and success.
The Algon Group is a financial advisor and investment banking firm based in Atlanta that specializes in distressed situations. During the last 12 months, the Algon Group has successfully advised home builders and developers on restructuring a combined debt of more than $3 billion. For more information, e-mail Troy Taylor, president, or Larry Comegys or Travis Hendren, managing directors; call them at 813-220-4630; or visit the Algon Group Web site at www.algongroup.com.
Take Control of Your Finances
“Accounting & Financial Management for Residential Construction,” available through BuilderBooks.com, is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.
To view or purchase this publication online, click here, or call 800-223-2665.
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