Government contractors need access to funds to finance ongoing operations, and in most instances the collateral for a loan will be a government contract and/or a sub-contract with a prime contractor.
Lending to a government contractor requires an understanding of, first, the relationship between the contractor and the government, and second, the peculiar legal relationship between the lender and the government. In almost every instance the lender will need to secure the loan with the contract that the borrower has with the government or a prime contractor. In those instances where the contractor secures the loan with a subcontract, in most cases it will be with a large company with sufficient financial sway to provide the necessary assurance to the government of its ability to perform. Lenders must take into consideration a number of factors, including the type of contract, the types of filings required under the Uniform Commercial Code and under the Federal Assignment of Claims Act, assignment of contract receivables, the appropriate advance rate, required guaranties, and appropriate reporting and monitoring procedures.
We begin the process by helping the lender understand the transaction’s inherent risks and advise the lender as to whether there need to be any adjustments in underwriting and documenting the appropriate credit memorandum. We assist the lender in reviewing the due diligence documentation – in most cases, organizational documents, relevant contracts and sub-contracts, as well as any supporting collateral documentation. We then document the loan and work with the lender to negotiate loan document terms and conditions and to close the loan. Lenders frequently have to deal with the decision to make loan advances without following the “letter of the law” requirements to properly secure the loan, and we help the lender make the decision about the appropriate course of action.
In those circumstances where the borrower runs into financial difficulties – be it getting not paid by a senior contractor, not getting paid by the government, complying with loan document covenants, or repaying the loan – we assist the lender in reaching a practical resolution and getting the loan repaid. Where appropriate, we assist the lender in negotiating forbearance agreements, negotiating with the borrower over remedial measures, managing the loan out of the institution and, where appropriate, instituting collection litigation and/or bankruptcy proceedings. While we focus on achieving a win-win solution, we recognize that is not always possible; however, we help our clients reach the best resolution possible in dealing with the troubled government contractor.