As the pandemic recession drags on, most motorcoach operators find themselves in a difficult position, especially when it comes to paying for their fleets.
In this situation, owners need to assess their options and make the best decisions about vehicle finance they can for their circumstances, says Edward P. Kaye, an attorney, and vehicle finance expert.
Kaye is a managing partner in the vehicle finance law firm of Schickler Kaye, LLP. He is the former President, CEO, General Counsel and Co-founder of the Advantage Funding group of companies, one of the largest independent financiers to the motorcoach industry. Kaye is also the immediate past president and a current board member of the National Vehicle Leasing Association (NVLA).
He knows how lenders think, their boundaries, and their decision-making process. He shared some best practices for communicating with lenders during the pandemic in a recent UMA Town Hall.
Here are the takeaways from his presentation:
Know the contract terms
Read it and understand it — or hire a professional to advise you. The pages of the loan agreement guide the lenders’ decision-making process. Reach out to the lender before the last deferral expires or the loan goes into default, preferably in writing, and follow the notice provision in the contract.
Communication is critical
If it isn’t possible to make payments, communicate often, and be honest. It’s important to understand the backdrop of today’s lending environment. Lenders are facing historic losses. Most lenders have already written down your loan on their books.
While loan deferrals “have been kicked down the road as far as they can go,” lenders don’t want to take back vehicles. There’s an incentive to get to a “win-win,” where the operator keeps the coach and the lender starts getting paid again.
Lenders’ options include continued deferrals to avoid repossession, taking a short sale and short payoffs to exit the loan, and refinancing at a lower rate and/or extending the repayment term, which avoids repossession or voluntary surrender.
Taking the collateral back and liquidating it means collecting 10-25 cents on the dollar because there isn’t a “meaningful market to resell.” Lenders aren’t set up to maintain and refurbish repossessed coaches to make them ready for resale.
The current economic backdrop for lenders can be a business owners’ leverage, according to Kaye.
Protect your assets
Understand what corporate and personal assets are at stake, and whether it’s too late to protect them. The first step is hiring a qualified counsel that can lay out the options, such as:
- get out of the business
- scale down operations
- pledge additional collateral
- surrender collateral
- sell underutilized collateral yourself
“If you were not successful negotiating your plan, it may be time to hire an attorney that is not emotionally tied to the discussion,” said Kaye. “Problems can snowball out of control and multiply quickly. Focus on the result and not necessarily who communicates the message.”
Selling a company won’t be easy in today’s market, but it’s possible. There are deals getting done. Kaye recommends working with experts who can value the business and create meaningful payouts.
Develop a plan with concrete goals
Develop a plan with realistic, concrete financial goals. Clearly state your plans and what you hope to accomplish with the lender. Potential options are:
- another round of deferral interest-only payments
- partial principal and interest
- voluntarily surrender collateral
- discounted payoff (which might have a prepayment penalty)
- termination of ACH (automatic debit) payments
Support documentation is crucial. Kaye suggests hiring an accountant if necessary to provide financials that support your recovery plan. Documentation should include a Year To Date Balance Sheet, Profit & Loss Statement, and 12-60 month forecast (base case, best case, worst case).
“If your plan does not have any meaningful and realistic revenue recovery, your options are limited,” Kaye said. “Have a hard conversation with yourself to determine if it is realistic to stay in business.”
If all else fails, consider bankruptcy
The good news with this worst-case situation is that Chapter 11, Subchapter V bankruptcy provides a more affordable option to reorganize for small businesses. It’s an easier, less expensive and quicker version of Chapter 11 reorganization for small businesses and individuals, provided their debts are primarily business debts. Passed as part of the Small Business Reorganization Act (SBRA) earlier this year, before the pandemic, it originally capped secured and unsecured debt to $2.75 million but was increased to $7.5 million for a year as part of the CARES Act.
Before making any major decisions, Kaye strongly advises operators should consult with qualified counsel.