Black Monday, the 1987 stock market crash that had US and UK stocks plummeting over 20%, put the kabbash on pricing cross listed IPOs on separate days. Up until that fateful weekend, the brightest minds on Wall Street would price a company’s trans-Atlantic IPO in New York on Fridays and London on the subsequent Monday.
The British Petroleum IPO straddling the Black Monday weekend was particularly unfortunate as the world's stock markets collapsed between the opening and closing of the offer. The investment banks lost a bundle and – thereafter - cross listed stock offerings were priced on the same day.
Yes, the bankers underwriting BP were fools to guarantee the London flotation regardless of market pricing. They chose to ignore the obvious risk factor and a written warning from underwriters’ counsel because the group think said, “that’s how it’s done.”
With the above example in mind, I encourage commercial real estate investors to reconsider the established practice of risking your earnest money deposit when sellers have agreed to a financing contingency. The reality of the capital markets is that banks may fail or withdraw financing even after a commitment is issued.
To whit, a former Lehman Brothers commercial mortgage banker recently told me that during the Long Term Capital Management crisis of 1998, he torpedoed six financing commitments for pending acquisitions. Due to LTCM’s implosion, Lehman was forced to preserve its precarious balance sheet and, in the world is unfair category, underhandedly reneged on six commitment letters. Do you care to guess which six erstwhile buyers during the LTCM crisis failed to close and lost their deposits?
If the seller agreed to a financing contingency, why should your deposit be at the whim of a banker or the capital markets? Consider structuring your P&S agreement to enable the return of your deposit in the event that the lender defaults on its commitment and fails to close. Risk allocation – when a financing contingency is stipulated – should remain with the Seller until closing.
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