Passing The Buck

Following on from last week’s article, where the clients own properties in an off shore company, and the loan on these has been called in by the lender due to a minor breach in the lease; the clients were unsure whether there was a personal guarantee given when they took out the loan.  Their assumption was there was not; however, I insisted that they must find out.  This is crucial in deciding what strategy they employ.  If they do not have a personal guarantee they have less of the problem and the bank then has an issue.   

One of our clients amassed a huge commercial property portfolio, before the credit crunch.  If I recall correctly West Bromwich was the lender.  They are a 160 year old firm, which started off as a local bank, and then took a more aggressive lending strategy.  They were lending without the necessity of a personal guarantee.  My client says the reason he is still standing today is because he did not give any PGs on any of the loans he had taken.   

Back then, the model was you could borrow a high LTV, that too based on the valuation, and not the purchase price; which, in some circumstances, one could come to a situation where little or no money was put into the deal. 

In the aftermath of the credit crunch when values had plummeted, but the debt remained high, he turned around to the banks and said they have an issue, and they both should sit down and sort it out.   

He was left holding all the cards.  He knew the assets better than anyone; and in a market where the pool of buyers had dried up, he was in a prime position to purchase all the properties back up again, albeit at a far cheaper price.  In retrospect, he made money during the credit crunch for two main reasons; he didn’t give a PG, and he was prepared to play and stay in the game.    

In the current situation, if it transpires the clients have not given a PG, this could open up another angle to the situation; as with a breach (albeit minor) which will need to be disclosed to any potential purchasers, it is likely to put off the cursory buyer.   

This would then potentially make them the front buyers for the bank instead of the debt being a liability, they can now take it off their books, though with a large percentage wiped off, often referred to as 50p in the £1.  

As current market conditions are declining this may actually be a viable option for the bank, as a realistic solution.    It will be interesting to see how this plays out.  I suspect as this year progresses, there will be several situations like this arising, though I suspect most will have PGs attached to them.

Suresh Vagjiani
Suresh Vagjiani
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