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.

Savvy workout professionals take time to let the borrower know exactly what is expected by the bank before the first meeting takes place and then reinforce that information at the meeting. A bewildered borrower is of little help in troubleshooting the problem and looking for solutions. A prepared and thoughtful borrower who is willing to engage the lender may find a way out that is palatable to the bank. The fifth and final post in our series taken from my Urban Land article, "What to Do Before Defaulting," lays out some basic steps for a commercial borrower to follow before meeting its workout team for the first time. Do not assume that your borrowers know these steps, even if they are otherwise sophisticated investors or business people. Tell them clearly and as simply and as soon as possible.

Bankruptcy is often a good option where there are numerous unsecured obligations or other complications, such as litigation, that are difficult or costly to resolve, both in time and money. If your commercial borrower appears to be at its wits end and is contemplating bankruptcy, it is usually worthwhile to see whether some pre-filing planning is possible. Where there is an operating business, the borrower will need your consent (or the Court's order) to use your cash collateral or to obtain "DIP (debtor-in-possession) financing" to keep the company afloat while it reorganizes. In those cases, if the borrower does not come to you, reach out to it before the bankruptcy petition is filed. The fourth installment of my Urban Land article, "What to Do Before Defaulting," outlines topics that could be fruitful for pre-petition discussions between borrower and lender.

The goal here is to get the bank paid as quickly and inexpensively as possible. It is easiest to accomplish the goal while working with a motivated and cooperative borrower. One of the telltale signs of an experienced workout professional is the ability to help the borrower past the "denial stage" to face the stark reality of a troubled loan so that a thoughtful strategic workout plan can be formulated and implemented. Many borrowers are poorly counseled to take a combative approach with their lender. Others are not counseled at all and come totally unprepared to their first meeting with the workout team. Still others have no idea what has happened to them and even less grasp as to what is going to happen next.

Recently, at the request of Urban Land magazine, I wrote an article (with the assistance of two attorneys who were then associates here at JMBM) addressed to commercial real estate borrowers who are on the brink of defaulting. Entitled "What to Do Before Defaulting," workout professionals will find this article helpful in making it clear to their troubled borrowers exactly what they need to do. We've segmented the article into five separate posts, the first of which follows.

The concern here is to double check exactly the description of the collateral that is being sold at foreclosure. Where the notice is prepared by an outside vendor, it is critical to make certain that the vendor has all of the necessary information to prepare the notice properly. Even then, costly mistakes can be made, so it is very important to check carefully.

To download a copy of the registration form below, click here.

My program will be aimed at an experienced audience of chief lending officers, chief credit officers and loan administrators. We'll touch on issues involving bankruptcy, foreclosure, workouts and forbearance agreements.

I will be speaking on Monday, March 22nd at 1:05-2:30 p.m. and Tuesday, March 23rd at 1:30 p.m. to 2:30 p.m. The Conference will be held at the Renaissance Esmeralda in Indian Wells, California and will run from Sunday, March 21 to Wednesday, March 24. Hope to see you there.

For more information about the Lenders Conference please visit: http://www.calbankers.com/content/event_detail.asp?EventID=1012

First, it is necessary to understand that a creditor cannot take a security interest in a taxpayer's right to a tax refund. We've seen unwary lenders naively assume that the IRS is going to honor a security agreement and a UCC-1 financing statement. The usual result is the tax refund lands in an account at another bank and is used to pay "more pressing" obligations. Because a secured creditor cannot take a security interest in the right to a tax refund before the refund is issued, the lender must take steps to channel the tax refund so that once paid out by the Government, it goes to pay down bank debt.

The JMBM Special Assets Team has developed a technique that minimizes the substantial risk that a borrower will divert the tax refund and put it to other uses. This technique requires the taxpayer/borrower to elect direct deposit of the refund into a bank-controlled blocked account, which is subject to the bank's perfected security interest. While not foolproof, the use of a direct deposit into a blocked account reduces the risk of diversion and increases visibility to the bank.

To download a copy of the registration form below, click here.