A Refinancing Conundrum

Back in 2007, one client in the social housing sector had the misfortune to have had Northern Rock as its main finance provider. When Northern Rock hit its well publicised problems in that year, the loan book was transferred by Northern Rock to Lehman Brothers. When this latter institution collapsed in magnificent fashion in 2008, Administrators were appointed to collect in the monies due. Vague threats were then made to our client by the Lehman Brothers staff working on behalf of the Administrators regarding technical non compliance with debt covenants, which could have resulted in the 25 year loan being repayable on demand with the addition of significant penalty interest. In the past Northern Rock had issued an annual letter to confirm acceptance on these particular areas of non compliance, but there was nothing in the main loan agreement about these points. It was likely that Lehman Brothers had purchased the loan balance at a discount from Northern Rock, but it was not possible for us to determine the level of discount.

Our client came to us after the collapse of Lehman Brothers for help in dealing with all the potential problems and finding a satisfactory solution.

There were a number of other complicating factors:

  • The client’s board was very mixed in terms of commercial experience and so care had to be taken in keeping the Board appraised of appropriate developments and ensuring that no panic arose
  • The nature of security possessed by the lender was not conventional because of social housing regulations which prevented purchase of social housing stock by any party other than another approved social landlord. Lehman Brothers could not therefore take possession and sell off the housing stock.
  • There was very much a vacuum in trying to deal with the Administrator because of the difficulty of finding an appropriate contact because of the vast scale of the Lehman Brothers Administration. In addition, it appeared that our client’s loan had been re-allocated internally within Lehman Brothers, therefore making it more difficult for the Administrators to confirm where any cash on repayment should be allocated.
  • There had been problems encountered in the property stock valuation basis because of use of a different firm of valuers than previously used, thus potentially causing issues in providing security for a new lender
  • The debt market was in a degree of turmoil, because of the difficulties encountered by RBS and HBOS, meaning that it was very difficult to obtain any funding.
  • The social housing regulator was very keen to see a satisfactory solution and wanted to be kept of informed of all developments

We helped the client focus on the key objectives:

  • Avoid any publicity
  • Find an appropriate (and stable!) finance partner going forward
  • Ensure that the financial forecasts and available security would meet the requirements of the lender
  • Negotiate an acceptable exit from Lehman Brothers
  • Complete the refinancing

Very quickly, we put together a plan which involved the following steps:

  • Exploring all the possible alternative courses of actions and potential outcomes
  • Make contact with senior administrator personnel to talk through the issues
  • Identify any scope for repaying the loan at a discount, assuming a new finance partner could be found
  • Ensure appropriate communication was in place for all interested parties such as the Board, Regulator, potential funders and other advisors
  • Appoint a top tier law firm to deal with any claims by the Administrators regarding non compliance with covenants
  • Appoint a PR firm to deal with any issues arising and ensure alarm was not spread to tenants
  • Arrange appropriate advice for the Board on matters of insolvency
  • Identify potential lenders who would be keen to provide replacement facilities.

Our role we played in the subsequent refinancing included;

  • Rigorous review of options and alternatives
  • Introducing a supportive lender
  • Deal management – ensuring all the relevant parties were proceeding in the manner agreed and that no time critical deadlines were being missed
  • Leading negotiations with the Administrator
  • Ensuring that financial forecasts were robust and would stand up to external scrutiny.

A highly satisfactory outcome was ultimately achieved:

  • No potentially damaging publicity was experienced
  • A new lender with a good reputation in the social housing sector was able to provide a banking facility which allowed for repayment of the balance due to the Administrators
  • The Lehman Brothers debt was repaid without any penalty interest which could have been charged under a strict interpretation of the loan agreement.

This was a very challenging and unusual assignment but does show our approach to more typical corporate finance assignments:

  • Identify the objectives
  • Put together a plan
  • Ensure that all the required resources are assembled to work through the plan
  • Communicate effectively with relevant parties to ensure that the plan is on schedule
  • Identify any potential difficulties and ensure that these are addressed directly
  • Complete the task!
Tom Craig
About the author

Tom founded Craig Corporate in 1985. He is now Chairman of Craig Corporate and sits on the board (as a non-executive or Chairman) of several companies...
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by Tom Craig