Bank Loan Workouts: What to Send to Your Counsel
A new deal has come into Special Assets and has been assigned to you. The line officer tells you that the customer has been a good customer of the Bank for several years and that you can expect nothing but cooperation. Everything was fine until last year, when business slowed to a crawl and cash flow dried up. The loan matured and the financials simply did not support the automatic extension that both line officer and customer wanted.
Your initial analysis confirms that until recently, the loan performed as agreed. You are fairly certain that you are going to be dealing with a business that has fallen on hard times, but might be able to right itself. The business is hanging on to old inventory rather than liquidate it, but it has leased out part of its building to raise extra cash.
After meeting with the customer and again reviewing the financials, you conclude that the best way to manage this credit is to temporarily forbear from enforcing existing financial covenants and to change the payment schedule to better match the expected, albeit reduced, projected revenue stream for a short time to see if the customer can manage its way out of the problem. The end of the quarter is fast approaching, and you need this deal documented and signed within days.
You have loan services copy the loan documents and send them to the JMBM Special Assets Team™ (good choice!!) to document your deal and turn it around promptly. When the loan documents arrive, however, your lawyers find that they need more information. They can get started, but they can't finish without more.
Counsel tells you that they also need the current outstandings, the UCC-1 financing statements, amendments and continuation statements and a UCC search. The lawyers also ask for the most recent borrowing base certificate and if you have one, an appraisal of the equipment and inventory would shed some light on the deal. Counsel also asks to see the loan policy of title insurance, as well as the new lease and the most recent appraisal of the property. One of the business owners recently retired, so we also need to see the entity documents, such as the LLC operating agreement. And just to be sure we get it right, can you please send over the credit authorization?
You wonder, "Why do they need to see all of that just to document a forbearance? Are they going to read every word of that mass of documents and bill the Bank hours and hours for doing so? If they read it all, this deal will never get documented!!" Good question, but rest assured, there are excellent reasons why experienced bank counsel want to know what you know before diving in and starting to write loan documents.
You've spent several hours wading through the credit file, the legal file and the appraisals. You've been to the site, seen the plant and talked to the customer. You've debriefed the line officer and talked to credit administration. You've had a few weeks to put all of this information together to get a clear view of the credit, and you are pretty sure you know what you want the documentation to do.
The lawyers are new to the deal. They are being asked to absorb a wealth of selected information quickly, to learn documentation that someone else drafted and to apply the changes you've specified - all in a matter of days. To do this, they may not need to read every line of every document you have sent to them, but they will need access to those documents at a moment's notice to get the job done. Today, for the modest cost of scanning, copying and printing, you can provide total access to your counsel that will enable him or her to get the job done right and on time.
The simple reason why lawyers need quick access to the raw materials of loan documentation is that they often do their drafting during off-hours. During these busy days, bankers and lawyers are working hard after normal business hours. On weekends, at night, early in the morning - any time that a few uninterrupted hours can be found, workout professionals are addressing the complex, time-consuming part of the job. Bankers can't write up credits while the phone is ringing off the hook or they are in a meeting, and lawyers can't draft loan documents and forbearance agreements without peace and quiet, either. We can't write loan documents and agreements without constantly referring to the existing documentation and other information that is relevant to the credit. If we have them on hand, we can get the job done without interruption.
One of the most savvy and experienced workout professionals I know makes it a standing practice to send us everything anytime he gets that feeling that counsel is going to become involved in the deal. He sends the documents to us often weeks before he finally decides to get us involved. His rationale: counsel can run conflict checks, get the documents on site and in the file, ready for immediate use should the need arise, all for the modest cost of scanning, copying, printing and mailing. He's prepared when that emergency strikes to call us and get us involved at a moment's notice.
At the JMBM Special Assets Team™, we've been retaining electronic copies of documents and other materials whenever our clients send them to us. It takes almost no time to save the attachment electronically (and it costs nothing), but it sure saves time when we need to insert a legal description of real property, recite the interest rate, draft a waiver of financial covenants or correct a mistake in existing documentation. (That's not to say that we don't usually have to print out complicated loan documentation. It's virtually impossible to trudge through 40 or 50 pages of documentation on a computer screen!!)
We also use the information you send to us to double check the status of the Bank's liens, having recently witnessed what happens when the lender assumes that the lien is valid but never bothers to check. Most of you are probably aware that a major bank came up short in collecting its eight-figure supposedly secured loan to the Heller Ehrman law firm. A bank employee had mistakenly filed a UCC termination statement, which had the effect of immediately unperfecting the bank's security interest in the law firm's major asset, its accounts receivable. After the firm filed its bankruptcy case, the bank's security interest was avoided and the bank will lose the benefit of being a secured creditor and be required to share pro rata with the unsecured creditors. If ever there was a lesson to be learned, this sad incident teaches us to double check the UCC filings and the title insurance policies to be certain that the bank actually has the collateral position it thinks it has.
Good counsel ask and listen to what their clients want and need, and good workout professionals anticipate those questions and do what can be done under the circumstances to help get the job done. In the end, it is a real team effort between banker and counsel to get mountains moved, deals cut and documented and loans collected.
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.