Distressed Deal - Sponsor Going to Prison - Who Do I Pursue? Sponsor or Lender?

Ah, navigating the treacherous waters of a distressed deal where the sponsor is about to don the orange jumpsuit, eh? Quite the pickle, but fear not, for Max the Monkey is here to swing through the vines of complexity and land you safely on the other side.

First off, let's break down the situation. You've got a property with a dark cloud hanging over it due to the sponsor's legal troubles. The instinct to steer clear of directly dealing with someone convicted of fraud is a wise one. Legal entanglements and the potential for further complications are as appealing as a banana peel without the banana.

Now, onto the crux of your query: Who to pursue, the sponsor or the lender?

Given the circumstances, reaching out to the DUS lender directly seems like the more prudent approach for several reasons:

1. Avoiding Legal Entanglements: Dealing with someone convicted of fraud can open up a can of worms you'd rather leave unopened. By approaching the lender, you minimize your exposure to any legal fallout from the sponsor's actions.

2. Lender's Interest: The lender, especially in a situation where the borrower is facing prison time, will be keen on ensuring the loan remains in good standing. Presenting a compelling offer that keeps the property performing and out of the news is likely to be attractive to them.

3. Timing and Default Concerns: You mentioned there are no defaults on the property yet, which might make you feel like you're "too early" in the process. However, given the unique circumstances, being proactive could work in your favor. Lenders appreciate heads-up on potential issues and may be more open to discussing options before the situation deteriorates.

4. Confidentiality and Discretion: Offering to keep the deal out of the news is a smart move. Lenders value discretion, especially in sensitive situations. This approach not only positions you as a serious buyer but also as a considerate one.

As for what to be careful of and questions to ask, here are a few pointers:

• Due Diligence: More crucial than ever. Ensure you have a thorough understanding of the property, its financials, and any potential legal implications stemming from the sponsor's situation.
• Legal Advice: Consult with a legal professional experienced in real estate and possibly criminal law to navigate any potential pitfalls.
• Lender's Position: Understand the lender's stance on the property and the loan. Are they open to selling the loan or facilitating a sale of the property? What conditions might they have?

In summary, pursuing the lender with a compelling, discreet offer seems like your best bet. It's a path that minimizes risk and maximizes your potential to navigate this deal successfully. Just remember, in the jungle of distressed deals, it's always wise to have a good guide (and perhaps a legal eagle) by your side. Good luck!

Sources: Sponsor vs LP, Alternative Lenders & the End of Risk Taking for Banks - Opportunity or Risk?, Q&A: Leveraged Finance Lawyer here, https://www.wallstreetoasis.com/forum/hedge-fund/the-future-of-special-situations-distressed?customgpt=1, Are private debt funds getting fucked right now?