Daily News: March 26, 2012

GlassRatner Opposes Small Business Borrowers Protection Act

GlassRatner Advisory & Capital Group publicly stated its opposition to Senate Bill 448. Currently pending before the Georgia Legislature, the bill is intended to limit the amount that a purchaser of distressed debt can recover from a guarantor of that debt. While not impairing any rights that the creditor may have against the pledged underlying collateral or any direct borrower, the proposed law would create new limits on recovery against guarantors that don’t currently exist. As one of the largest bankruptcy and restructuring firms in the Southeast, GlassRatner is involved in credit resolution, servicing of distressed debt and negotiations with both lenders and borrowers on a regular basis, often dealing with the guarantees in question here.

According to Ron Glass, founder of the firm, “One of the many technical issues in the ongoing debate around Senate Bill 448 is whether the passage of the bill would have a negative impact on the price that a selling bank would receive in the sale of distressed debt.”

Richard Gaudet of the firm was asked to testify before the house banking committee as to the specific topic of how the existence of a guarantor influences the price that a distressed debt buyer will pay for a debt. In his testimony, Gaudet explained: “That in the pricing of distressed debt, a buyer will determine the expected cash flows and apply a discount rate based on perceived risk of collections. In this process, I believe there is rarely any value placed on guarantor recovery. As such, I don’t think the bill would have a direct impact on the pricing in the market.” Gaudet also stated, “The absence of a guaranty would potentially impact the timing of resolution as well as the available resolution strategies due to the loss of the ability to influence borrower behavior via the guarantee.”

Gaudet, a former banker who has been involved in the purchase and sale of distressed debt was asked to comment specifically on pricing strategies and was not endorsing the passage of the Bill.

Glass further stated, “GlassRatner does not support the passage of this Bill. Our firm recognizes that guarantees are often an integral component of a debt transaction. These guarantees and the quality of guarantors are specifically factored into the risk profile during the loan making process. Ultimately, this could affect the capital available to purchase distressed debt.”