Refinance Now?  The Safest ESOP Investment? Get an Interim ESOP Valuation?
The ESOP Association Mid-Atlantic Conference
March 13th Charlottesville, Virginia

Ronald J. Gilbert, President of ESOP Services, Inc., esop@esopservices.com moderated the panel of two experienced advisors, Kenneth Hostetter, Senior Vice President, Senior Private Banker of Wells Fargo. kenneth.hostetter@wellsfargo.com and Joseph Gilbert, Financial Advisor and Assistant Vice President Investments of Wells Fargo Advisors, joseph.s.gilbert@wellsfargo.com both based in Washington, DC area.

Key Take Aways

Should an ESOP Company Refinance Now?

Now is certainly the time to take a hard look at refinancing company term debt that is either related or unrelated to the company’s ESOP.  Sellers who have monetized their Qualified Replacement Property (QRP) and acquired Floating Rate Notes (FRNs) should also review their existing credit obligations.  Know first where each credit facility stands with the interest rate and then reach out to an experienced ESOP banker or financial advisor to discuss the opportunity.

How Safe are Floating Rate Notes (“FRNs”)?

The vast majority of FRNs carry a put option that allows the holder to put the FRN to the issuing company, in many cases on an annual basis, at 97% or more of the original   value.  While selling a portion of the QRP will trigger capital gains tax on the difference between the original basis and the sale price, the sale of a portion of the QRP may still be advisable if the FRN value has declined and/or the issuing company’s credit rating has been lowered.  In a turbulent stock market, many investors will unfortunately have the opportunity to harvest loses.  These loses can be used to offset some or all of the capital gains incurred with the sale of the FRN.

Do We Need an Interim Valuation for our ESOP?

For companies with a December 31, 2019 fiscal year end, many ESOP annual valuations may not have been finalized and/or distributions to ESOP participants have not been made.  Management, boards of directors, and ESOP trustees should not rush to judgement regarding an interim valuation performed more frequently then annually.  While there may be circumstances that require some companies to take this step, it is too soon for most to access the economic impact of the pandemic at this time.  Be patient.