The bridge to an Abyss: Bridge loans, like bridges, need to be anchored at both ends-otherwise, they're just a pier

RMA Journal, The, Feb, 2002 by Jeffrey Leeds

"For a bridge loan today, we will gladly repay you tomorrow," came the request from Reginald Q. Meanswell, the president and CEO of Slipree Contractors Group, Incorporated. While perhaps we should have taken a page from Popeye, whose friend Wimpy continuously tried to wangle a hamburger, there was nothing to alert us that we were creating a bridge to oblivion.

Slipree Contractors Company, a well-established New England firm, was the main operating arm of its parent company, which happened to share the same name. Like a number of entrepreneurial companies in the 1980s, Slipree had begun to take on construction projects in the Middle East. A successfully completed previous contract with the government of an oil-rich nation had opened the door to black golden opportunity. A new contract for faculty housing at Omar Gaht University had just been awarded to Slipree. Meanswell wasted no time in securing a construction loan commitment for $42 million from a consortium of six international banks.

As the start date of the project grew near, the consortium's lead bank informed Slipree in writing that there'd been a small snag and the funding would be slightly delayed. But to reach project completion by the beginning of the fall term at Gaht U., work needed to begin on time. With the commitment letter and the delay letter in hand, Meanswell came to our bank, Carractur Counts. Actually, he didn't have far to travel. Meanswell not only was a pillar of the community, he also held a seat on the board of CC, as did his father before him. And father before him. He didn't have to bother with formalities. And there was a board meeting that day.

"Got a great contract going," Meanswell confided to CC's new president, Franklin Speakin, smiling broadly. "This could open up lots of doors for Slipree, and we're raring to grow. But I need a small bridge loan of $4 million to get this project off the ground." Speakin smiled back at the pillar as Meanswell explained the project and the funding. He asked some general questions that Meanswell answered with ease, showing the commitment letter and delay letter. Nothing unusual here, Speakin thought to himself, other than it being a project in the Middle East. But this was just a 90-day bridge loan; the real construction loan would be in place shortly, the government is flush with cash, and the whole thing should get wrapped up quickly. What could go wrong? "You've got a deal," Speakin said, knowing and enjoying the pleasure he was bringing to his esteemed board member as well as solidifying his stature as CC's new CEO.

About 60 days into the loan, Meanswell called Speakin and related a small hitch. The funding had been approved, all right, and, as he had told Speakin when asking for the bridge loan, the first draw on the proceeds from the consortium's construction loan would be more than enough to cover expenses and repay the bridge loan. But the government had found some fault with the project, and the marble in the first phase would need to be removed and replaced. "Would a 30-day extension be a problem?" Meanswell asked brightly "You know we're good for the money." Speakin agreed to the extension.

Unknown to CC, things were a little murkier than that. Oil prices had started to decline, which meant less revenue for the sheiks, who continued to spend with abandon with little regard to other obligations. The marble was just the first of many "problems" the government inspectors would find with the project in an effort to delay payment while saving face. Meanswell asked for one more extension and also asked that the loan be changed to the parent company. Speakin was nervous, but felt there was little else that he could do.

It was about this time that credit officers at CC began looking a little more closely at Slipree's finances, in particular, the current consolidated balance sheet made available at the renewal period of the bridge loan. It grew clear that the entire group of companies under the parent company had become very highly leveraged and were expanding on a "thin equity" base. We also noted a slowdown in business within nearly all of the companies.

The conclusion? The bridge loan had not really been a bridge loan at all; rather, it was an emergency infusion of cash. Money that was coming from the sheiks also was going to meeting other Slipree debts instead of CC. But could we prove that the bridge loan request had been made under false pretenses? No. We had seen the commitment letter as well as the letter stating there would be a slight delay in getting the money to Slipree. Meanwhile, Meanswell kept asking us to "hang in there," telling us how bad he felt and promising payment.

What if bankruptcy were declared? Our attorney advised that bankruptcy would be a disaster. When the bridge loan was made, CC's president had not included the documentation requirement that the lead bank send the first portion of construction loan proceeds to our bank to repay the bridge loan. This would have been an easy provision to include and most likely would nor have met any resistance. In effect, however, we had created a bridge that was anchored only at one end. Meanswell may have meant well, but the fact remained that he was using money advanced by CC Bank to pay off other debts.