What Is A Stalking Horse Offer And How Does It Work?
This BLOG On What Is A Stalking Horse Offer And How Does It Work Was Written By Matt Herbolich MBA JD LLM CMLP NMLS 1649154
The Stalking Horse Bid – “Pros & Cons”
An experienced real estate investor is probably familiar with the term “stalking horse” as it relates to bidding on and buying listed assets of a debtor currently in Chapter 11 bankruptcy.
- A stalking horse bid is essentially the first bid on a debtor’s assets in advance of any formal auction.
- With a stalking horse bid, the bidder typically has the opportunity to perform its own internal due diligence on the asset(s) while those who show up at the auction may not have the time to perform the same inspection of the asset being sold.
- Bankruptcy courts require the debtor to sell assets to settle claims with creditors and to obtain the highest amount possible
- A stalking horse bid is one way the debtor can at least establish a “floor” of the assets as a way to avoid lowball bids at an auction and establish at minimum a satisfactory return.
What Does Stalking Horse Mean?
A stalking horse is somewhat of a misnomer as it hints the potential buyer is hidden from the public, the courts and creditors.
- The term is an old hunter’s term where the hunter would hide behind his horse while getting as close to the prey as possible.
- During Chapter 11 proceedings, everything is approved by the court, including stalking horse bids.
Here are some pros and cons of such a transaction from the perspective of the proposed buyer.
Pros Of Stalking Offer Bidders
Stalking horse offer bidders typically receive a form of a guarantee, called a break-up fee that will compensate the stalking horse bidder for some or all of the expenses the bidder incurred during due diligence.
- These expenses can include significant legal fees, ordering and paying for third party appraisals to determine the current market value of the debtor’s assets.
- In case the stalking horse is not ultimately the successful bidder and was outbid at the auction, a negotiated break-up fee can help compensate for some of the losses.
- These fees can vary but a typical break-up fee can range from 1-3% of the final purchase price, but again any fee must be court approved.
- A stalking horse is in a better position to help craft any deal which can include specific assets the debtor owns, lien position of outstanding creditors and any contracts the debtor is under which may or may not be included in the sale.
- This ability to establish an initial rule of transaction is often used by the court and can even establish the bidding rules for the auction.
- Getting there first means the stalking horse has the ability to favorably affect the outcome of the auction.
Event Of Multiple Bidders On Stalking Offer Bids
In the event there are no bidders at an auction, the stalking horse bid is awarded the assets listed in the agreement at the approved amount.
- Because a stalking horse bid is completely transparent.
- Other potential bidders may see the existence of such a bid and decide to move on to another potential transaction and forego wasting any assets of its own to research the potential deal.
Cons Of Stalking Horse Offer
Just as being first can have its advantages so too can being first have some drawbacks.
- For example, if during the negotiations between the bidder and the debtor are not ultimately approved by the creditors committee or court Trustee, the agreement is void if successfully challenged.
- A stalking horse bidder wants to acquire the desired assets at the lowest possible price but must also make an offer that is reasonable given the current circumstances.
Stalking Horse Offer Bids
Stalking horse offer bids are not always successful.
- The bidder expends time and talent evaluating the ideal offer that will secure the successful acquisition but even after research and independent asset appraisals the final value may later be determined to be lower than originally estimated.
- For example, should there be an auction and no one shows up, the bidder is still required to pay the original amount, even if the final value proves lower.
- Stalking horse bids can be outbid at an auction.
- This means if the stalking horse bid is outbid at auction the bidder not only loses the opportunity to acquire the assets but only receives break-up fees and only those break-up fees approved by the court and creditors committee.
- Any stalking horse bidder should be very clear at the outset that while there are advantages of being first there may also be disadvantages.
- The Trustee will require all parties to follow the agreed upon terms of any negotiations.
About The Author: Matt Herbolich MBA JD LLM CMLP NMLS 1649154
Matt Herbolich NMLS 1649154 is a senior writer for Gustan Cho Associates Mortgage & Real Estate Information Resource Center. Matthew Herbolich is also a licensed mortgage loan originator for The Gustan Cho Team at USA Mortgage, a division of DAS Acquistion Company NMLS 227262. USA Mortgage, headquartered in St. Louis Missouri, has a national reputation for its no lender overlays on government and conventional loan programs. Matt, armed with two law degrees (JD and LLM) as well as an MBA, is the Editor In Chief for Loan Consultants and guest writer for multiple national mortgage & real estate websites. Stay tuned for more information by Matthew Herbolich in the days and weeks to come.