In this economy, Eric Lohmeier, left, and Leo Skeffington decide whether a company is worth more ‘dead or alive.’ Photo by Duane Tinkey
In this economy, Eric Lohmeier, left, and Leo Skeffington decide whether a company is worth more ‘dead or alive.’ Photo by Duane Tinkey

Eric Lohmeier and Leo Skeffington spend a good bit of time in the weeds – the overgrown fields of bad debt that have accumulated since the financial collapse of 2008 and 2009.

Lohmeier is the founder of NCP Inc. and Skeffington is the senior vice president, having come on board in 2007 after working for a wholesale banking operation.

NCP started life as an investment banking firm. Lohmeier is a chartered financial analyst and president of the Iowa chapter of the profession’s trade organization.

From 2001 to 2007, the company fed off mergers and acquisitions and exits of healthy companies, primarily mid-market firms with revenues of between $100 million and $1 billion.

“The world changed in 2008 and 2009,” Lohmeier said. “It was sudden and immediate. … A lot of people, even the gray hairs, hadn’t had the experiences of what 2008 and 2009 brought.”

In Greater Des Moines, those years saw the collapse of the state’s largest home builder, a rash of business bankruptcies and an escalation of lawsuits against developers who were in default on their loans.The fallout is still being felt.

“What we did in 2008 when things got really quiet really quick was say we have to sit down and figure out how we’re going to retool this business, because we didn’t think it was going to be a near-term, quick-turnaround type of thing,” Lohmeier said.

The firm was getting calls from businesses in a financial crunch, with owners who had placed what were becoming worthless personal or corporate guarantees on loans for properties that were rapidly losing value as collateral.

“In any given week, we would have 15 to 20 calls come in saying, ‘I need financing,’” Skeffington said. “We realized that with the capital markets crashing, no one was going to finance these deals. Then we decided there was a way to help both sides of the equation.”

As a result, NCP made a switch and focused on being a restructuring adviser.

“Because of the size of the deal flow coming in, we knew that no one was going to finance or refinance any of these, so we started to direct our efforts into that,” Skeffington said. “We were probably 12 months early in the game in terms of volume and probably another six months ahead of anyone thinking this was going to be a long-term problem.”

Lohmeier, concerned about keeping his company operating, began reading textbooks about the restructuring advisory business.

“It was like going back to school,” he said. “I would find out-of-print stuff; I would find used books on Amazon.”

Since 2009, NCP has done $250 million in business, primarily helping companies restructure their balance sheets, renegotiating the terms on loans and determining whether troubled companies “are worth more dead or alive. Are there other contingencies, the big one being personal guarantees, and how are we going to work these out,” Lohmeier said.

Ninety-nine percent of the business has been outside Iowa, primarily in St. Louis, Kansas City, Denver, the Vail valley in Colorado, California and Ohio.

Lohmeier and Skeffington said that in Iowa, banks are reluctant to take a haircut on a bad loan, and borrowers frequently are too willing to escape their debts in bankruptcy court.

“Des Moines seems to be behind the times so far as just working together,” Lohmeier said. “Whatever the resolution means, and it might just mean we are going to work together to take everything apart, when they start suing each other, nobody wins.

“Sometimes it is necessary to go to court, but what we do is gain significant efficiencies by just getting the parties together and working this out. The reality is, nobody is going to come out of this whole.”

Skeffington added, “Loss mitigation is a win.”

The firm frequently is contacted by attorneys who are attempting to keep a company out of bankruptcy. NCP recently secured a more favorable forbearance agreement for a Kansas dairy operation that was at odds with its lender. The firm improved the schedule for when notes were due and lowered overall interest rates on the loans.

In the end, the bank was made closer to whole than it would have been if it had called in the loans.

At the start of negotiations, the bank was convinced that the dairy’s goal was to seek bankruptcy protection.

“Going in, these two sides were really at it,” Lohmeier said. “Sometimes bankruptcy is the best solution. Sometimes, the two sides will never agree that it’s sunny outside today. Maybe a borrower is so upside down that a Chapter 7 (liquidation), not a Chapter 11 (reorganization) is the most practical. Sometimes a liquidation can and should be the outcome, but that is the exception to the rule.”

Lohmeier and Skeffington also have seen several tricks of the workout business. When property taxes go delinquent, it generally is an indication that an owner is having financial problems and is looking for leverage with a lender.

Property taxes amount to a superior lien, meaning they must be paid before the lender makes a recovery on its loan.

“If you’re letting those property taxes accrue, you are dollar for dollar discounting whatever your ultimate recovery is going to be,” Lohmeier said.

On the other hand, banks are under pressure from regulators to reduce the bad loans they have on the books at a time when other banks are reluctant to lend to borrowers who are credit risks.

That’s quite a switch from the heady days before the recession. Skeffington noted a client who was sought out by a lender who was offering a $1 million loan based solely on a personal guarantee.

The result is a lot of bad financial turf to restore.

“It’s like three yards and a cloud of dust,” Lohmeier said. “It’s not the investment banking model that you see … it’s bloody work.”