Hi Kids,

Here is the scenario I have been asked to explore.

Director is 40% owner in a company that is asking for a 7.5 Million LOC for operating expenses. The company has good financials, strong leadership and excellent credit. 4.2 Million of the line is existing debt that is being renewed. 800k is an increase and the 2.5 million is being used for expenses related to upfront expenses related to a new government defense contract.

The loan will have no origination fee and will be non-recourse toward the director (that's the kicker).

There is a competing institution that is making this offer and we are being asked to match the offer. On the basis of the competition, I say this is not preferential treatment, so long as we can document the identical offer.

With the letter, I feel I have a case for showing non-preference. Another problem is that I don't have any other non-recourse loans on the books.

Your thoughts please.

Is the offer letter material to the discussion?

Absent the letter, this is trouble all day long.

To note: The loan(s) are well secured with receivables, equipment, and the DoD contract. Borrowing base will be in place

What would the bank do - what has the bank done! - if another similar customer came to the bank with such an offer?

The loans NOT made could be your "similar treatment".

Yeah, that was my philosophy. I'm being told that the competing offer would be ignored (in the eyes of an examiner) as justification for doing the deal since we don't have a similar deal on the books. I also made the point that just because this scenario hasn't been presented doesn't mean we wouldn't do it if it were presented with such.

So...

Personally, I think non-recourse is a dumb deal, but if we've done it for others and we can document the competing offer, we should be okay.

Any weight to the comment that an examiner would disregard the competition as justification for doing the deal?

In my experience, examiners will look for similar transactions....finding none will lead to the discussion of "you didn't do this for anyone else".

In my experience, examiners will look for similar transactions....finding none will lead to the discussion of "you didn't do this for anyone else".

Agreed!

I'd echo what the other said, you need proof that the credit extension would be similar to something else your bank has done before, not something that another bank wants to do.