"Illuminating the Dark Side of the Bank During Challenging Times" - What Workout Professionals Do When A Troubled Credit Is Transferred Into Special Assets
I'm writing this as I head home from this year's California Bankers Association Lenders Conference at Indian Wells. It was an interesting event, with sessions on topics as diverse as sales and marketing to an economic forecast to my program that covered the progression of a loan from default through workout, forbearance, foreclosure and bankruptcy. In the 90-minute timeframe that I was allotted, it was a challenge to cover even the highlights of the issues that might arise in a typical commercial working capital revolving line to a business with a real estate term loan. I decided to base the program on a hypothetical based on a true life troubled loan and to focus on issue-spotting and one of my favorite topics for workout professionals taking over a credit - fact gathering and keeping an open mind.
My program started by laying out the hypothetical situation of a business that has moved into its second generation and is now being led by the son of the founders who wants to expand and grow the business. It's a typical scenario that bankers often see, and many times, everything goes well. But in our scenario, the business expands too rapidly, sustains an unexpected problem that eats into cash flow, resulting in an event of default under the loan. We've posted the slide show that I used in the program, together with the hypothetical facts on which the program was based below.
We enter the stage when the credit is transferred to a workout professional. First, I discussed some of the things that the workout professional ought to do to gain an understanding of the credit. These are basic steps that are often overlooked by bankers who are busy dousing fires on multiple fronts. After debriefing the previous loan officer, looking through the credit file and reviewing the credit authorizations, I recommend that the workout professional should head out into the field to visit the customer and see the business or the property first hand.
There is another school of thought, and it makes sense in some cases. Some believe that it is important to establish authority over the credit immediately. In order to underscore the authority that the new officer has over the credit, they believe that the better course of action is to call in the borrower and the guarantors and make it clear who is now in charge. Perhaps this is a matter of style, but this methodology carries with it a risk that the new workout officer will reach an early conclusion without being fully informed about the facts.
When the borrower and guarantors are called on the carpet, they tend to clam up. When I first get involved in a deal, I need information. I am not a wallflower, and neither are my workout professional clients. The real pros spend a few sentences explaining why they are now handling the credit for the bank, pointing out that all communications need to go through the new officer and making it clear who is running the show.
There is no better place to do this than at the borrower's plant or place of business, especially where the real estate supplies critical value to supporting the credit. No matter how many pictures you see, appraisal reports you review or credit write-ups you read, you cannot get the "feel" of a business or a property until you walk the site. So take the time to visit the borrower at his shop, let him get familiar with the fact that you are now the face of the bank and above all, let the borrower talk. Listen carefully. Most borrowers love their business and most love to talk about it. You will learn important information by asking for a tour of the facilities and inquiring every time you see something you do not fully understand.
When the topic came up this week at the CBA Lenders Conference, I told the group to think about the tour as if they were on an elementary school field trip. Youngsters keep asking questions until they get a satisfactory answer. Bankers who are visiting their borrowers' place of business for the first time would do well by doing the same thing. Keep asking until you get an answer, and file away that information for a later date, as it may turn out to be a kernel of critical information.
One of the attendees at my program related an interesting story that illustrates this point. He had a property on which the building had been constructed out of bricks. The present building was seismically dangerous and needed to be torn down and replaced. Everyone assumed that there would be a big cost in demolition and disposing of the old bricks. But a tidbit of information surfaced that changed the workout and the approach to be taken. It turns out that the old bricks were once used in an old local post office dating from the 1860s. Once the building was demolished, the bricks had great sentimental value and were sold as commemorative items at a premium price.
The lesson to us all is clear. The deal and the collateral are new to the workout professional. That's a good thing, if you come to the credit without a pre-determined mindset and are willing to listen and learn. Keep an open mind, ask the questions you need to ask and put together the pieces of the puzzle to the extent you can before reaching a conclusion as to how best to get the Bank paid in full.
The program continued on to discuss the fundamentals of a forbearance agreement, in which the lender agrees to forbear from the exercise of its default-related rights and remedies for a period of time, usually in exchange for a paydown, additional collateral or some other concession. We also discussed foreclosure and alternatives to foreclosure, such as receiver's sales, assignments for the benefit of creditors and consensual sales. I closed the session with an overview of the most common issues that a secured lender has to face when the customer files a Chapter 11 bankruptcy case, such as filing a proof of claim, getting a cash collateral order that is acceptable to the bank, getting adequate protection payments, obtaining stay relief, getting the property sold in a section 363 sale and plan confirmation issues.
Each of these topics is, in itself, something we could discuss for hours, and we will, in further editions of the SpecialAssetsLawyer.com blog.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM's Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we've seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM's Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM's Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association's Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.