October 14, 2014

Q: Why do you use Mr. Schumacher’s personal cash support instead of personal cash flow when calculating Global Cash Flow since you are taking the distributions into account?

A: The only way we can verify cash actually available to support borrower debt is by reference to a guarantor's highly liquid assets. It's the proof of the pudding. A guarantor can have massive personal cash flow, but the key issue is what he does with it. His or her highly liquid personal assets tell us how much of the personal cash flow surplus is actually retained and available to service borrower debt.

Mr. Schumacher has demonstrated a propensity to either invest his personal cash flow in non-liquid assets or to otherwise dispose of the cash. He has clearly shown a personal financial strategy that diverts the significant cash flow he received from the related party companies in the form of distributions and loans in 2007 to someplace other than liquid investments. Regardless of the guarantor’s financial strategy, it is only prudent that we consider ready cash in lieu of cash flow in that it is likely that the cash flow will be reduced or eliminated in time of financial difficulty at the borrowing business.  

Q: Why didn't we look at restructuring the loan with the balloon?

A: Since our focus in the webcast is on analyzing global cash flow available to service debt, we chose not to consider the impact of refinancing the Sequoia loan. A refinance and a reduction in required debt service in 2008 will be critical to avoiding a financial crisis for the family of companies. With the many options available to accomplish that purpose, we instead devote our attention to fully understanding the cash flow management practices and options in play for the companies.   

Note, however, that we did emphasize in the webcast that it was crucial for Mr. Schumacher and Sequoia Properties to restructure its term debt in order to significantly reduce scheduled debt repayments in 2008.

Q: After analysis should the lender discuss these findings with the business owner to find out how they plan to maintain the business?

A: Absolutely. We have the responsibility to share the issues we’ve surfaced with the potential borrower as part of our dialogue with management. This type of candid conversation adds to our professionalism and enhances the value we bring to our communities. A borrower’s management team is responsible for leading the company in a positive direction and our input describing the risks we see and business options worthy of consideration must be part of our lending relationships. Even so, please note that it is not suitable for us to dictate which option management implements, but, instead, to respond to the risks associated with the decisions management makes.