Purchasing a loan directly from a bank whether at par or discount is a not-often-used technique that is easily executable and solidifies the new lender’s lien position immediately.  It is not widely used for the obvious reason that most lenders prefer to use their own legal docs and to have as much time as needed for diligence.  This works fine for normal credits, but not when a company is being kicked out of a bank or quickly needs to change lenders.  Sophisticated lenders have used this technique to win deals, quickly transition clients and beat the competition due to fast closing times. This technique has left the competition in the dust wondering how another lender could close so quickly.

Competition is brutal when trying to get the attention of special assets managers, investment bankers and companies given the amount of capital providers in today’s market.  Purchasing a loan directly from a senior lender is a technique that is the absolute fastest way to finance a company out of a bank or, frankly, any institution while at the same time securing a perfected lien position.  In a competitive process when time and certainty to close is of the essence, we have found that purchasing a loan puts us at the front of the line.  You have to assume and be prepared to finance the risk post-loan purchase, but it can be accomplished quickly and with no hassles. The result is also a great relationship with the bank as you will have efficiently helped them exit a problem client and provide more capital to the client.

Right now, the market for alternative lenders, which for the sake of this article shall broadly include all non-bank lenders, has never been more competitive.  Many debt funds comprising hundreds of billions of dollars under management have been formed to capitalize on the inefficiencies of regulated institutions as well as the availability limitations of asset based lenders.  In a zero sum game the goal is clear, which is to take market share from the banks who make the market with their low cost of funds.

Banks can be slow to on-board, but certainly fast to off-board and, if done right, purchasing a loan is the fastest way to off-board. The loan purchase transaction is accomplished by entering into a Loan Purchase Agreement (“LPA”) with the bank that is a very basic form. This form contains the requisite purchase/assignment language, indemnifies the bank and, at the same time, allows a new lender to step into its shoes.  A UCC-3 assignment form is required, but that is easy to do and a mere formality in what can normally be a cumbersome process. The new lender would concurrently enter into loan amendment that would alter the term, rate, structure, etc. for a short period of time while a more comprehensive loan agreement is drafted.  A comprehensive loan amendment could also be entered into concurrently depending on the type of lender.

The process with most banks is flawless – sign the LPA, cut them a check and they send you a box of papers.  The risk is clearly on the other side of the transaction, but what this does is save time and ensure a smooth transition from one lender to another. The purpose of doing this is to take advantage of existing lien perfection and any boot collateral that might exist. We have done this transaction several times and have been pleasantly surprised by the boot collateral that the bank had obtained over the years.  The boot collateral would have never been on the table had we gone through a longer and more competitive process, but by acting quickly we obtained additional collateral and later brought in an asset based lender, which only had a security interest in the working capital.

Another nuance of this transaction is facilitating a bank-to-bank switch or bank-to-ABL transaction by having the subordinated lender purchase the senior lender’s loan and bridge to another senior lender.  We have done this transaction many times where we temporarily filled out the entire debt capital structure – senior and subordinated debt.  Doing this enabled the Company to have adequate time to find a new senior lender at which time we completely subordinated to the new senior lender except for some non-traditional boot collateral.  Doing this allowed us to lock in our subordinated debt position, make the incumbent bank happy, and provide the client with the opportunity to find a senior lender that would provide the right long-term solution.

This technique has served our firm well, made us friends at banks across the country and is not used enough in what has become one of the most competitive markets in recent history with billions of dollars sitting on the sidelines.  Purchasing a loan should be used in rare instances, but for the right occasion it can be tremendously effective when time is of the essence.