"Straight from the Stalking Horses Mouth" Co-authored by Ryan K Cochran and Blake D Roth ABL Advisor
It goes without saying that a lender must work to maximize its recovery when a borrower is in default and has no reasonably realistic or meaningful way to cure the default.
This scenario far too often forces a lender to determine the most efficient and effective method to sell its collateral. As part of that decision-making process, a lender must consider how any course of action will serve to protect the lender from allegations and perceptions (i) of self-dealing or favoritism in the selection of the buyer, (ii) of under-valuing the collateral, (iii) that the collateral was not effectively marketed, (iv) the lender sold the collateral for too little, or (v) the lender sold the collateral through a secretive process. In this article, the authors address these issues and discuss:
- Why some methods of liquidating collateral are superior to others;
- How a chosen method for liquidating collateral can protect a lender; and
- What a lender can do to establish an effective process to liquidate its collateral.
Generally speaking, the easiest way to monetize collateral is by sale, and there are two primary methods of liquidating by sale—private sales and public sales (e.g., an auction). Private sales are characterized by direct negotiations of terms between the buyer and lender or the lender’s representatives. In contrast, a public sale involves exposure of the collateral to the market and competitive bidding amongst parties, with the collateral being sold to the highest or otherwise best bidder. In many instances, a public sale process is preferable to a private sale. For example, when the price is uncertain a public sale may be used effectively to set the market price rather than the lender or its representatives having to determine the price.¹ Further, when more than one purchaser has interest in the collateral, a lender or its representatives can allow the public sale to efficiently select the purchaser. In such a scenario, the public aspect of a public sale adds an element of transparency to the process, permits interested parties to participate in the bidding, and lessens any potential appearance or allegation of impropriety in the selection of the successful bidder.²
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