DELVACCA PRESENTS What I Wish I Had Negotiated With The Bank September 14, 2010 DELVACCA thanks Fellheimer & Eichen, LLP for their generous sponsorship.

DELVACCA PRESENTS

What I Wish I Had Negotiated With The BankSeptember 14, 2010

DELVACCA thanks Fellheimer & Eichen, LLP for their generous sponsorship of this event.

Can you negotiate?Can you negotiate?

• When the Bank is looking for your company’s business, it is in sales mode and will try to accommodate your requests.

• How much the bank wants your company’s business determines the extent to which the Bank will allow changes to the documents!

© Fellheimer & Eichen LLP 2010

Soooo!Soooo!

• Here are some things you should try to negotiate – which will help in the long run, especially if there is a problem!


Do You Really Want That Do You Really Want That SwapSwap??

Banks often suggest a “Swap” to “fix” the interest rate for the term of the loan.

What is a “Swap?”


A A Swap Swap is:is:

• An agreement totally separate from the loan agreement

• With its own terms; defaults; and penalties

• With a different department of the bank or sometimes a different company all together

THIS IS A TOTALLY SEPARATE CONTRACT FROM THE LOAN – IT IS REALLY AN INVESTMENT SECURITY


• The Bank will set the interest rate at a floating rate, most often so many basis points over LIBOR (London Interbank Offered Rate)

• The Swap will provide that in lieu of your paying the floating rate to the Bank, you will pay the fixed rate set in the agreement to the Swap Partner and the Swap Partner will pay to the bank the floating rate.


If interest rates go If interest rates go upup

• You pay the smaller fixed rate and the Swap Partner loses money paying a higher floating rate

• YOU ARE A WINNER


If interest rates go downIf interest rates go down

• You pay the larger fixed rate to the Swap Partner and the Swap Partner makes money paying a smaller floating rate to the Bank

• YOU ARE A LOSER


If for any reason the If for any reason the Swap Swap is is terminated prior to maturityterminated prior to maturity

• You either have a gain or loss depending on the value of the Swap – which depends on what has happened to market interest rates.


If interest rates went down If interest rates went down since you did the since you did the SwapSwap

The value of the Swap has increased and if you terminate you owe the difference in value which is often substantial!


If interest rates went up If interest rates went up since you did the since you did the SwapSwap

You have a gain

IN SHORT

A Swap Is A Volatile Security

You are betting on the interest markets!


IFIF

• You fail to make an interest payment timely

• You default on the loan, even a technical default

• You need or want to pay the loan in full prematurely


The The SwapSwap is thereby is thereby terminated terminated

• And, depending on the interest rates you either owe the Swap Partner or the Swap Partner owes you!

• At what may be the worst possible time, your company may have to find a lot of money to pay the Swap Partner


• The cost to unwind the Swap could be more than the balance due on the loan.

The numbers get real big!


• Remember – your loan officer doesn’t work for the Swap Partner and has no ability to help you.

• The Swap Partner is totally separate from the lender


• One client defaulted on a $2.1M loan and had to pay a $700,000 Swap unwind fee

• Another had a $7M Swap unwind fee on a $20M loan

• I took one of those things once and thought I’d have to pay $1M on a $5M loan when I sold the property (fortunately interest rates went up in the interim and I only had to pay $350,000 to pay off the loan)


Does your company really Does your company really want to purchase a want to purchase a

speculative security betting speculative security betting on the interest rate market?on the interest rate market?


If NotIf Not

• Don’t agree to a Swap

• Take the float

• Rates may go up, but you won’t have to pay a penalty to get out


Choice Of Law and VenueChoice Of Law and Venue

• Seems simple enough – they just put a clause in the boiler plate saying: X State’s law applies and/or all disputes must be resolved in the State and Federal Courts of Y State.


Courts Honor Choice Of Law Courts Honor Choice Of Law and Venue Clausesand Venue Clauses

• Did you know that Pennsylvania courts have held that if you have a choice of law clause, that can confer jurisdiction on that state. Nationwide Mutual Ins. Co. v. West, 2002 PA Super 282, 807 A.2d 916, 920 (Pa. Super. Ct. 2002). Thus, if the parties have designated a particular choice of law provision in a contract, then that should govern. University Mechanical & Engineering Contractors Inc. v. Ins. Co. of North America, No. 00-1554, 2002 WL 857105, *3 (Pa. Com. Pl. May 1, 2002).


So your company could find So your company could find itself having to litigate Far itself having to litigate Far Far Away (and you won’t Far Away (and you won’t have Shrek or Donkey to have Shrek or Donkey to

help you)!help you)!


Confessions Of JudgmentConfessions Of Judgment

In Pennsylvania and Delaware your Bank’s documents will likely contain a Confession of Judgment


Not a problem in Not a problem in New JerseyNew Jersey

• There are no confessions allowed under New Jersey Law

• BUT a Confession obtained elsewhere in a valid out-of-state transaction can be domesticated in New Jersey

• N.J. Stat. § 2A:49A-25 (2010)


The Borrower hereby empowers any attorney of any court of record, after the occurrence of any Event of Default hereunder, to appear for the Borrower and, with or without complaint filed, confess judgment, or a series of judgments, against the Borrower in favor of the Bank or any holder hereof for the entire principal balance of this Note, all accrued interest and all other amounts due hereunder, together with costs of suit and an attorney's commission of the greater of 10% of such principal and interest or $1,000 added as a reasonable attorney's fee, and for doing so, this Note or a copy verified by affidavit shall be a sufficient warrant. The Borrower hereby forever waives and releases all errors in said proceedings and all rights of appeal and all relief from any and all appraisement, stay or exemption laws of any state now in force or hereafter enacted. Interest on any such judgment shall accrue at the Default Rate. No single exercise of the foregoing power to confess judgment, or a series of judgments, shall be deemed to exhaust the power, whether or not any such exercise shall be held by any court to be invalid, voidable, or void, but the power shall continue undiminished and it may be exercised from time to time as often as the Bank shall elect until such time as the Bank shall have received payment in full of the debt, interest and costs. Notwithstanding the attorney's commission provided for in the preceding paragraph (which is included in the warrant for purposes of establishing a sum certain), the amount of attorneys' fees that the Bank may recover from the Borrower shall not exceed the actual attorneys' fees incurred by the Bank.

THIS IS A CONFESSION OF JUDGMENT


OR TO PUT IT OR TO PUT IT ANOTHER WAYANOTHER WAY

It is an agreement that if the bank decides to sue you – you

agree in advance that YOU YOU LOSE!LOSE!


Asset Based LoansAsset Based Loans

• Loans where the Bank lends daily based on asset availability

• Customers are told to pay their invoices directly to a “lock box” which really means that all payments are made to the Bank and not the vendor/borrower

• A “lockbox” is a euphemism for paying directly to the Bank


Asset Based LoansAsset Based Loans

• Each day’s cash receipts are taken by the bank and applied to the loan

• You then calculate how much your company is entitled to borrow based on a formula

• Generally X% of eligible accounts plus Y% of eligible inventory


Potential ProblemsPotential Problems

• The Bank controls 100% of your company’s cash

• If there is a dispute with the Bank, the Bank can shut your company down immediately by simply withholding cash

• You are at the absolute mercy of the Bank!


Best ProtectionBest Protection

Keep a significant amount of cash available in a place other than the

Bank where you borrow!


Most Loan Agreements Most Loan Agreements Prohibit The Prohibit The

Maintenance Of Other Maintenance Of Other Bank AccountsBank Accounts

• Solution – don’t use a bank account

• Use a brokerage account; mutual fund account or other safe, insured cash holding vehicle


Potential ProblemsPotential Problems

• Ineligible Receivables

• In the fine print of the loan agreement, ineligible receivables include– Receivables to a company that is

more than X days past due on any receivable to your company

– Or affiliated with a company with past due receivables


• Foreign Receivables are ineligible, unless you negotiate this issue in advance

• Receivables more than Y days past due

• Inventory is very limited and often only includes raw materials and/or finished goods.

• Work-in process is rarely included in the formula


Loan CovenantsLoan CovenantsThe Bank will require covenants about:

•Debt Service Ratio•Net Worth•Equity Capital•Compensation•Payments to Vendors•Capital Purchases•Loans or Leases from Others


Negotiating Negotiating Financial CovenantsFinancial Covenants

• Have your CFO Prepare a Worst Case scenario and agree to

75%75%

of that scenario!!!!


That WayThat Way

• If the Company has an off quarter or six months

• YOUR COMPANY WON’T DIE


• ALWAYS DEMAND AND GET NOTICE OF ANY DEFAULT AND A REASONABLE OPPORTUNITY TO CURE

• WITHOUT IT, YOU CAN FIND YOUR COMPANY WITH AN UNCURABLE DEFAULT!


Cross And Cross And Spreader ClausesSpreader Clauses

• These are clauses that increase the signor’s liability

And/Or

• Expand the bank’s rights under the agreement

The Bank Gets

MORE© Fellheimer & Eichen LLP 2010

Generally Such ClausesGenerally Such Clauses Are Not Highlighted Are Not Highlighted

• Simply lurking in the definitions


Guaranty of Obligations. The Guarantor hereby guarantees, and becomes surety for, the prompt payment and performance of all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Bank, of any kind or nature, present or future (including any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other interest rate protection or similar agreement, or in any other manner, whether arising out of overdrafts on deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Bank's non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, and any amendments, extensions, renewals or increases and all costs and expenses of the Bank incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including reasonable attorneys' fees and expenses (hereinafter referred to collectively as the "Obligations"). If the Borrower defaults under any such Obligations, the Guarantor will pay the amount due to the Bank.


Read the BoilerplateRead the Boilerplate

• The Guarantor is guarantying:

• all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Bank, of any kind or nature, present or future



• Under the language in the quoted document, your guarantor is liable for virtually anything the Bank wants to claim



Most mortgages say:

“The Borrower/Guarantor/etc. hereby grants, transfers, enfoefs, etc. as security for the Obligations. . .”

What is an “Obligation?”


NOW, THEREFORE, for the purpose of securing the payment and performance of the following obligations (collectively called the "Obligations"):

(A) the Loan, the Note and all other loans, advances, debts, liabilities, obligations, covenants and duties owing by the Mortgagor to the Mortgagee of any kind or nature, present or future (including any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Mortgagor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other interest rate protection or similar agreement, or in any other manner, whether arising out of overdrafts on deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Mortgagee's non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, and any amendments, extensions, renewals or increases and all costs and expenses of the Mortgagee incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including reasonable attorneys' fees and expenses.


IN OTHER WORDS

This definition allows the bank to make demand against the collateral and/or guarantor for anything the bank can possibly claim the debtor owes the bank in any capacity. You think you guaranteed a single loan and in fact you’ve guaranteed the loan; the deposit account; other loans; bank’s checking fees, i.e., each and everything the lender can possibly think of.


I am involved in a case right now where the bank has admittedly been paid in full, every last dime. The company is in Chapter 7. The bank may have liability for various WRONGS COMMITTED BY THE BANK WRONGS COMMITTED BY THE BANK for which the Trustee-In-Bankruptcy is suing for recovery. The Bank is now trying to claim against the guarantor of the paid off loan alleging that there was an indemnity clause with this type of definition of “obligation.” The Bank’s position is that it is entitled to indemnification if it has to spend money to defend itself or if it has to pay the Trustee-In-Bankruptcy because the Bank was found to have violated the law.


If your company just signs the If your company just signs the “boilerplate” and anything goes “boilerplate” and anything goes wrong, you and your associates will wrong, you and your associates will find yourselves in a very difficult find yourselves in a very difficult position.position.


DELVACCA PRESENTS What I Wish I Had Negotiated With The Bank September 14, 2010 DELVACCA thanks Fellheimer & Eichen, LLP for their generous sponsorship.

Documents

loan fellheimer eichen

winner fellheimer eichen

loser fellheimer eichen

lender fellheimer eichen

rate market

loan agreement

smaller floating rate

higher floating rate