How does bank lending work for an asset backed business?

[The Skunk]

Hi,

I've been thinking (hypothetically at the moment) about the possibility of buying a care home at some point in the future. Say, for instance, I wanted to purchase an established care home (or hotel, etc) - how would the bank appraise whether or not to lend?

Take the following scenario:

Care home appraised market value (for the land and buildings) - £1 million
Care home adjusted EBITDA - £200,000
Asking price for the business and building - £1.6 million

Would the bank view the £1 million as secured, such as a mortgage, and lend up to that value with little hassle?

Then, how would the bank view the remaining £0.6 million - would they only match whatever you would personally put up, i.e. I would have to stump up £0.3 million and they would match it? Or would they apply a multiple to the adjusted EBITDA and lend up to that? If so, would it be plausible to get the deal fully financed without inputting any personal capital (i'm doubting it but thought it might be worth asking )

Any input would be great. I realise the example is a bit basic and I'm basing it on an environment when banks have started to lend again!!

Cheers

Skunk

[m4tt]

The Skunk said:

Hi,

I've been thinking (hypothetically at the moment) about the possibility of buying a care home at some point in the future. Say, for instance, I wanted to purchase an established care home (or hotel, etc) - how would the bank appraise whether or not to lend?

Take the following scenario:

Care home appraised market value (for the land and buildings) - £1 million
Care home adjusted EBITDA - £200,000
Asking price for the business and building - £1.6 million

Would the bank view the £1 million as secured, such as a mortgage, and lend up to that value with little hassle?

Then, how would the bank view the remaining £0.6 million - would they only match whatever you would personally put up, i.e. I would have to stump up £0.3 million and they would match it? Or would they apply a multiple to the adjusted EBITDA and lend up to that? If so, would it be plausible to get the deal fully financed without inputting any personal capital (i'm doubting it but thought it might be worth asking )

Any input would be great. I realise the example is a bit basic and I'm basing it on an environment when banks have started to lend again!!

Cheers

Skunk

Notice you're in Canada, I will comment on UK as not familiar with Canada hopefully this will help.

For starters some banks won't lend on care homes, especially if you are in-experienced in the sector. That said banks are still very much open for business, just good business and at the right price. Gone are the days of 1% arrangement fees and 1% OBR for ok deals, now not even the best of the best would get close to those prices. So lets assume you find a bank that will lend on it:

Now I'm a little out of touch with commercial lending as I have moved into personal banking but 12 months ago I could lend 100% of bricks and mortar value as long as this did not exceed 75% of Bricks and Mortar and Goodwill combined. So essentially you would need to stump up £400k in your example. However we never lent on care homes this is just a general rule of max LTV on buying a going concern with property attached to the deal to give you some idea.

As for how the money would be lent, we would have wanted 200% interest cover and 100% interest cover assuming 10% drop in turnover AND 2% rise in Base Rate from EBITDA.

From what I can gather now from contacts I have 75% is still possible but 65% LTV is much more likely unless it is a cast iron deal, with ample succesful history and strong growth trends.

Hope that helps, if you want to drop me a PM feel free.

Matt

[The Skunk]

Thanks Matt - that's very helpful. I'm currently in Canada but moving back to the UK in August.

So, using the figures from your reply the banks might lend 65-75% of the combined bricks and mortar and goodwill value. Interesting - I wondered how it would be approached and I just assumed the lending would be assessed on two different criteria - i.e. the amount backed by assets and the amount backed by cash flow.

Just out of interest, what's the rationale for banks not lending to buy care homes? Also, what does OBR stand for?

Cheers

Skunk

[anonymous-user]

m4tt said:

Now I'm a little out of touch with commercial lending as I have moved into personal banking



Matt

Hi Matt

Out of interest what prompted the move into personal banking from commercial

A lot of my friends are in private or commercial banking and be interested to hear your reasoning, If I am being to nosy just tell me to do one..

[m4tt]

The Skunk said:

Thanks Matt - that's very helpful. I'm currently in Canada but moving back to the UK in August.

So, using the figures from your reply the banks might lend 65-75% of the combined bricks and mortar and goodwill value. Interesting - I wondered how it would be approached and I just assumed the lending would be assessed on two different criteria - i.e. the amount backed by assets and the amount backed by cash flow.

Just out of interest, what's the rationale for banks not lending to buy care homes? Also, what does OBR stand for?

Cheers

Skunk

I don't know why they wouldn't lend to care homes to be honest, probably because it's quite a specialist sector with many regulations and it could pose a reputational risk, same reason that most banks won't deal with the sex industry.

Naturally they will want the lending to be both secured and affordable so they would not just lend 75% of the value of assets unless the profits supported that level of lending.

OBR = Over Base Rate. Sorry using jargon!

MRSNEAK said:

m4tt said:

Now I'm a little out of touch with commercial lending as I have moved into personal banking



Matt

Hi Matt

Out of interest what prompted the move into personal banking from commercial

A lot of my friends are in private or commercial banking and be interested to hear your reasoning, If I am being to nosy just tell me to do one..

No it's fine; ideally I would still be in the commercial/corporate arena. However come Mar '08 we'd stopped lending and were focused on attracting deposits, then July '08 were all made redundant. Was not feasible for me to stay within the group, so took the Voluntary Redundancy option.

Had the summer off whilst looking for a job/on gardening leave. Had some contacts in Private banking and managed to get myself a role, which by that time I couldn't be too choosey with a pregnant missus and mine being the only income.

Ultimately all banking is dealing with people, as behind every business there is people, however I find business accounts much much easier to deal with than personal ones so will eventually end up back there, but enjoying a new challenge in the mean-time and getting some more exams under my belt.

Are you in the industry?