Credit Availability Increasing? . . . “Yes” for Employee Stock Ownership Plans (part 2)

Winstead PC
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Credit availability seems to be improving in the commercial markets.  One common (and obvious) test for new commercial lending is “how will the borrower fare in the tough times, or a stress test?”  Generally, loans to employee stock ownership plans (called an”ESOP”) do well.  So, loans to ESOPs will have access to credit.

Starting about 9 months ago, I started to see a resurgence in commercial lending.

One sign of the good times for lenders took me last week into the ring (not a WBA sanctioned event) with Lori Oliphant.  We discussed the topic of ESOP loans.  My opening combination ended with the stress test question:

  •  how do loans to ESOP companies fare when the company comes under stress?

The stress test concept is not new – it was just nudged out from the ring-side seats in the “old” economy.

Lori’s answer was simple: the nature of the borrower, amd the typical collateral structure and credit enhancement, combine to make loans to ESOP companies a capable contender, even when tested with the stress of tough times.

Here is her scorecard:

                      

  • the transaction is generally structured to have the plan sponsor lend money to the ESOP, in exchange for a promissory note
  • the bank lends money to the plan sponsor, in exchange for a promissory note
  • the loan from the plan sponsor to the ESOP is secured by the shares purchased by the ESOP (with the proceeds of that loan)
  • the bank loan cannot be directly secured by the shares purchased by the ESOP, so  . . .
  • bank secures its note with other collateral from the plan sponsor (and sometimes from the selling shareholders)
  • other “soft” factors supporting the loan: employee ownership culture fostered by the plan, and the tax-deductible nature of the contributions to the ESOP that are used to allow the ESOP to repay the plan sponsor (or selling shareholder) loan

Generally, ESOP loans go the distance. 

                                   

 

 

 

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Winstead PC
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