Case Studies

Cancer Specialists of North Florida Set New Loan Spread LowCSNF Overcomes Hurdles to Grab Prized Financing
A meaningful part of CMAC’s value is in its ability to empower bankers on the local level to offer more aggressive financing terms by sharing knowledge on what their bank has offered to CMAC clients in other markets. Each CMAC closing provides new data from which to push the ever-evolving boundary of favorable financing terms. In this instance, a national bank had recently closed on an Ophthalmology deal for a client in Iowa at a spread of less than 1.00% over Libor. That spread resulted in a 10-year fixed rate of just over 3.00%. At that time, CMAC became aware that this particular bank was trying to secure medical market share throughout the country. Banks are very cyclical in nature. As their loan portfolio evolves, they will have changing appetites in different industries and in different markets. It became apparent to CMAC that this particular bank was seeking to increase its medical market share and was willing to ‘buy the business’ by extending extraordinarily low rates to medical groups.

Because of the secular nature of any bank’s appetite, it is important to take action and move on these opportunities before the climate changes. As the bank saturates itself with medical clients, it will look to diversify through other industries and will inevitably begin to propose higher priced medical real estate loans. This will undoubtedly change. Their focus will switch to profitability, as opposed to increasing market share.

CMAC sent out an RFP to a number of banks in North Florida in hopes of securing more favorable terms than the existing financing. However, with this national bank’s appetite in mind, we made sure to connect the North Florida bankers with their colleagues in Iowa, so they could discuss the terms of the recent closing. Sure enough, this information empowered the North Florida bankers to provide exceedingly aggressive terms (5 basis points below the same bank’s sub L+1.00% spread on the Iowa deal). A new lower pricing benchmark was set and CSNF had a proposal in hand that would result in materially lower rates than their current loans. However, it was not quite as simple as it might have been. The appraised values meant that the Loan-To-Value on the new financing was going to be above the bank’s approved maximum of 85%. Undeterred, the bank made policy exceptions and took assignment of the previous bank’s swaps, and blended a portion of the negative value into the new interest rates as opposed to adding them to the loan amounts. This structuring enabled a refinancing of the entry debt —This meant that all of the debt could be refinanced without any cash out of pocket from the physicians.

Personal Guarantees
THE REAL RISK

While most of us are aware of the most obvious reasons for loan default (not paying back the money), a more common risk of default comes with the breach of covenants.  Many borrowers are routinely in default without even being aware and are putting themselves in harm’s way. Personal Guarantees are the primary cause of such defaults.

Personal Guarantees generally include a requirement that updated personal financial statements be provided by each guarantor on an annual basis. Beyond the hassle factor for whoever is charged with the collection of these documents is the reality that at least one of the partners will invariably fail to submit financials on time. That is a technical default. While your local banker who has always serviced your account may turn a blind eye, that can change in an instant when the bank gets acquired or a regulator comes in to inspect documentation.  Many loan documents don’t have a “cure period”, so turning in late financials doesn’t automatically end the default.

While the idea that a bank would call the loan based on this type of technical default sounds farfetched, CMAC has witnessed a spate of such actions by banks who may be looking for an excuse to remove or improve a loan that was added through acquisition or that does not meet its current portfolio standards.

Personal Guarantees are just one of the many technical defaults to be aware of. Others such as loan-to-value (LTV) or Debt Service Coverage (DSC) ratio also trigger defaults. Consider the case of a doctor-owner in Fort Myers, Florida who was cited for a breach when his property’s value declined below the specified LTV in the documents.  The bank used this technical default to terminate the loan.  Of course, the borrower could not come up with funds to immediately pay, so the bank offered a new loan at a much higher rate.  In this way, the bank legally increased the yield on a long-term client.

Another common technical default is not meeting the specified DSC ratio.  Even with the most lenient DSC of 1.0x (every penny made that year can be distributed) may be inadvertently broken if a practice estimates net income when making year end distributions.

It is important not to leave yourself unnecessarily exposed to technical defaults.  It’s like having your head on the chopping block: even if you trust the person wielding the axe above you, it’s an uncomfortable situation.