BDC Capital Reduces Bank’s Exposure After A Participant Exits

Case Summary:

Overview: A community bank had a mortgage in its portfolio to a customer with $10 million of revenues.  The mortgage had a 50% participant with a local lender.  The other participant was under regulatory pressure so it did not renew its participation in the mortgage forcing the bank to absorb the entire relationship which resulted in an exposure close to the bank’s in-house lending limit.

Challenge: The borrower had been profitable every year, but it needed to fund a deficit in the company pension plan.  The borrower had a defined benefit pension plan that had been underfunded and represented a personal liability to the owner.

Additionally, the balance sheet did not reflect the true value of the real estate owned by the affiliates.  The market value of the properties was substantially higher than the book value.  This resulted in a negative net worth on a consolidated basis.

Solution: As part of the overall loan restructure, the bank consolidated its loans to both the owner and the affiliated companies into a single $4,245,000, 20-year mortgage secured by real estate.  The bank also provided a term loan to pay down the deficit in the company pension plan. Faced with a doubling of its exposure on the mortgage, the bank requested that BDC Capital convert the bank’s line of credit to a daily, revolving working capital line of credit of $1 million.  The bank provided the lock box services and retained those fees.  The customer benefited from the flexibility provided by the new revolving line. The bank didn’t have this ability to do a fully followed, daily, revolving line or do in-house audits of the accounts receivable.  BDC Capital, with in-house auditing staff, shares the results of quarterly audits with the bank.

The bank was able to guide its customer to this win-win situation:  the customer obtained increased working capital while the bank reduced its exposure and retained a customer.

If you would like to explore ways to land additional business for your bank without taking on undue risk, give us a call at 781-928-1100 to explore how a partnership with BDC Capital can help.

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