Loan Sponsor/Key Principle Question

[Jeff Greenberg]

Loan Sponsor Question: This question was brought to me by a friend. He is a loan guarantor for a syndication. For that, he received cash flow and equity from the GP side. This is a recourse loan. The controlling GP is in the process of refinancing the loan and will no longer need the loan guarantor to sign on the loan. The controlling GP has asked the loan guarantor(soon to be off the loan) to take 50% reduction of their ownership including cashflow and equity. The friend asked to be bought out of the shares and was told that there were no funds available to buy them out. There is no discussion of this option in the legal documents. One other piece of information is the property is expected to be long term hold, meaning the equity is unavailable for a long time.

Without giving my opinion, I would like to hear what the opinions are from this group. Is the controlling GP making a reasonable request, and what would you do if you were the loan guarantor.

[Brian Burke]

If the documents provide for the guarantor to have a specific share of cash flow and upside in exchange for him providing a guarantee, and do not provide for a change in that relationship upon refinance, there’s no discussion to be had here. If the sponsor intended for the guarantor to take a haircut they should have negotiated that up front and written it into the agreement.