Posted: Wednesday 15 February 2012
Too good to be true?
In an earlier blog I touched upon the belief which exists within certain parts of the market that there is still a way to go in the re-pricing of non-prime assets. Some commentators are predicting that this re-pricing will take place through 2012 and into 2013, the hope being that we will start to see greater activity in the secondary market in the second half of next year.
I have also touched in the past on the likely impact new regulation will have on the cost of funding for non-prime assets. As debt for this type of asset becomes more expensive, it is thought that some property owners will be placed under pressure by banks to sell and there is a danger that transactions could be conducted at an undervalue. Given the drop which has taken place in the value of non-prime assets in recent years, determining whether a deal is too good to be true or just good may be more difficult than it would first appear.
Transactions at an undervalue are open to challenge by subsequently appointed insolvency practitioners. Transactions which are often most closely scrutinised are those involving connected parties where the onus can be on the buyer to demonstrate that the selling company was not insolvent at the time the transaction took place. It is more easy to demonstrate that the value achieved was a true value where transactions take place in the open market as these are market tested, however where deals take place off market, this may be less easy to establish. Sales to creditors are also open to scrutiny as there is a danger that this could be seen as preferring one creditor over other creditors.
Transactions should be properly structured and documented to minimise the risk of challenge. Deals are often done quickly in distressed situations where there is a need to raise cash and this can be lost sight of. Buyers run the risk of the property being transferred back to the selling company.
