The following is intended as a practical guide to owners considering whether and how to restructure aproperty that can’t support or refinance its current debt.
In the current economic climate, most often the situation arises because the existing debt, which was incurred in 2006 or 2007, is coming due and can’t be refinanced at nearly the same levels as the current debt.
The inability to refinance the debt arises from a combination of circumstances: values have fallen, underwriting of debt-to-equity levels has become more conservative, and spreads have risen dramatically to compensate lenders for perceived risk.
Here are some guidelines for owners trying to restructure debt that is too onerous to pay or refinance:
1. Preserve enough liquidity for the task: The prerequisite to a successful restructuring is having enough liquidity (i.e., cash) to carry through the restructuring. Many owners don’t focus on restructuring issues until they’ve been drained of liquidity, in which case failure is preordained. You will need cash for the following purposes:
• Paydown of the debt: Assume a 10% to 15% paydown on the existing debt will be required to persuade the lender to extend.
• Pay your own and the lender’s professionals: You will need cash to pay retainers and current billings to your restructuring counsel, restructuring adviser (if you have one), appraiser (the lender, new or old, will want a new appraisal) and the lender’s lawyers and consultants. Restructuring professionals require a source of payment not contingent on the restructuring being successful.
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