My partner, Guy Maisnik, is well-known as a fabulous real estate and hospitality law guru. Guy always seems to be closing an exciting deal for one of our good clients. Guy has been working on the Hidden Liens Project with the Commercial Transactions Committee of the Business Law Section of the State Bar of California, and he prepared a bulletin about a troublesome hidden lien that tends to surface when we close down an operating company for a secured creditor.
Workout Panel- "Tools of the Trade: Techniques for Handling Troubled Companies Outside of Bankruptcy"
21st century bankruptcy laws don't always fit the bill. Often, there are better, more efficient and less costly means of reorganizing operating companies and restructuring or enforcing debt obligations. On Thursday, August 12, I will be moderating an panel of experienced workout professionals in a program entitled, "Techniques for Handling Troubled Companies Outside of Bankruptcy." The panel will use a hypothetical business in distress to illustrate how bankruptcy alternatives such as workouts, distressed sales, receiverships, assignments for the benefit of creditors, foreclosures, and composition agreements can be used to address typical problems.
Hosted by the Turnaround Management Association of Northern California, the event will be held at the City Club in San Francisco at 155 Sansome Street, #150 from 7:30 AM to 9:30 AM. Register before the day of the event to save. To register and learn more, click here.
There is so much more to a workout than just drafting legal documents. My partner, Barry Freeman, recently published an outstanding article about the psychology of a workout in the esteemed Daily Journal. He describes the importance of understanding a borrower's perspective, who is likely to be in denial and frustrated about the problems his business is experiencing and the difficulties he faces repaying his lender. Handling this sort of situation can be tricky, but Barry gives several good pointers about how to best play the workout "chess game". It is a must-read.
Guaranties 101: What is a Continuing Guaranty? What is the difference between a Guaranty of Payment and a Guaranty of Performance? Must a Guaranty have a Limit or Maximum Amount?
Payment of most commercial loans to small businesses is personally guarantied by the owners of the business. While there is no hard and fast rule as to when a commercial loan must be guarantied, most lenders ask for the owners to guaranty payment of credit extended to a corporate or limited liability company ("LLC") borrower. There are several good reasons for getting the guaranty.
"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.
I am speaking at this year's California Bankers Association Lenders Conference in Indian Wells this week, highlighting many of the techniques that workout professionals use when facing a troubled credit. My topic is "Illuminating the Dark Side of the Bank in Challenging Times," and in the presentation, I follow a hypothetical situation through from the first signs of trouble through workout, forbearance, possible foreclosure and Chapter 11. Once the webmasters work their magic, we'll be posting the slide show on the SpecialAssetsLawyer blog.
It's a tough assignment to handle in 90 minutes, but I try to touch on some of the important points that come up in most troubled credits, many of which we have touched upon before in this space. I find that I keep coming back to Ten Points to Consider in Developing a Workout Strategy as a jumping off point where workout professionals can begin the process. The lesson to me is clear: know your deal. Know the borrowers and guarantors. Know the collateral. Do a liquidation analysis so you can evaluate opportunities to exit the credit.
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.
How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 5)
Experienced workout professionals carefully think through the first meeting with a troubled borrower. It is critical that the borrower, often unaccustomed to failure, recognizes why its loan has been reassigned to the Special Assets Department and why its new banker is a workout professional. It is also critical that the borrower comes to understand that the lender is willing to explore various means of getting the loan repaid consensually as an alternative to filing a collection lawsuit or foreclosing.
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.
How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 3)
It comes as a surprise to many commercial borrowers and lenders that they can be one another's best allies in a successful workout. Where the commercial borrower has an investment of both hard work and money to preserve, the banker has a loan to collect. Working together, borrower and lender can often find common ground that results in a successful turnaround for both. The third installment of my Urban Land Institute article, "What to Do Before Defaulting," discusses ways that a commercial borrower can work with its lender to avoid losing the property to foreclosure. Workout professionals often use these tried and true techniques to make sure that their troubled borrowers know what the bank needs to forbear rather than to foreclose.
How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 2)
All of the forbearances in the world will not help a property that has little chance of recovering in value. The market value of a property can and does change over time, and as many of our borrowers (and lenders) have discovered, that value can go down even faster than it goes up. Identifying and creating or preserving value is often a key to a successful workout, but many borrower and lenders fail to think dynamically and often miss critical factors. The second installment of my Urban Land article, "What to Do Before Defaulting," suggests that commercial real estate borrowers get a handle on the true current value of their property and how that value is likely to change as the market changes.
How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 1)
This blog is aimed at the lending community - so why are we giving hints to commercial real estate borrowers as to how to approach their lenders? There is, of course, a simple answer.
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.
Amend the Borrower's Tax Return and Help Pay Back A Loan (Part 2) - Directing the Borrower's Tax Refund
In the last post, we discussed the newly expanded net operating loss (NOL) carry back period, and explained how for some borrowers, the new law could generate "found money" that could be put to good use - such as paying down bank debt (one of my favorite uses!!). As with all gift horses, however, it is necessary to carefully examine this one so that the cash ends up where it ought to go.
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.
Amend the Borrower's Tax Return and Help Pay Back A Loan - How NOLs Can Generate Cash That Can Be Used to Retire Debt
Recently, a potentially significant change was made to the tax law that could be used by once-successful businesses to generate cash to pay down debt. Under the new law, a business is now able to carry back a net operating loss (NOL) sustained in 2008 or 2009 for five years. This is a major change from the previous law, which limited the NOL carry back period to two years. Workout professionals should be aware of this tool, as it may prove to be a valuable source of cash that can be used to deleverage a business.
The JMBM Special Assets Team™ has used NOL carry back provisions to help pay off troubled loans, but the new law potentially increases the chances of reeling in some serious found money. The additional three years of carry back losses makes it possible for a company to get a refund from the IRS for taxes paid up to five years ago. Why is that critical? Many companies were making a lot of money three, four and five years ago, and they were paying taxes on that money.
This is first of two articles where we will discuss the newly expanded NOL carry back period, show how it can generate significant cash and explain how bankers can help their troubled borrowers apply the unexpected cash windfall to pay down debt.
Negotiations with borrowers can be tricky and fast-paced. The workout professional needs to be able to respond to borrower inquiries quickly, authoritatively and without losing a step. While final numbers, covenants, terms and conditions must be developed carefully before being finalized, workout professionals know that Cash is King and that they must be able to deal with cash flow issues on the fly.
The workout professional who can make quick rough calculations without using his or her HP 12C has an advantage. A desperate borrower may promise you the moon just to buy time. An unsophisticated borrower may not know how much cash is available to pay the Bank and still keep the business operating. A complicated relationship with multiple deals may prove challenging for Bank and borrower, particularly where the borrower lacks an experienced CFO or controller and financial reporting is incomplete. The officer who can quickly comprehend whether borrower promises are realistic can keep the conversation moving without having to stop to run detailed calculations.
Workout professionals often ask us whether they should accept a deed in lieu of foreclosure offered by a borrower whose property is now worth less than the debt. What is a deed in lieu of foreclosure? A deed in lieu of foreclosure is where a borrower deeds the real property that is collateral for the loan to the secured creditor instead of going through the foreclosure process. When it works, a deed in lieu of foreclosure has advantages for both the secured creditor and the borrower. The borrower avoids a foreclosure on its record, and gives up responsibility for maintaining the property, paying property taxes and insurance, and providing security. Where there are tenants, the borrower no longer has to assume the responsibilities of being a landlord.
For the secured lender, a deed in lieu of foreclosure terminates a troubled debt more quickly than traditional judicial or non-judicial foreclosure. Instead of waiting at least four months for a traditional non-judicial foreclosure sale to take place, during which time the property can deteriorate, the lender takes title to the property immediately. The secured lender also avoids the cost of foreclosure, the potential cost of a receivership, and the possibility that the borrower will get cold feet at the last minute and file bankruptcy.
So why wouldn't a secured lender take a deed in lieu of foreclosure anytime a borrower offers one up?
Special Assets Law: How do lenders, manufacturers and investors preserve value, minimize loss and repurpose shuttered motor vehicle dealerships?
Thousands of motor vehicles dealerships will fail before the restructuring of the auto industry is over. Clients of the JMBM Special Assets Team™ are facing significant potential losses on loans to dealerships and property owners as these once-thriving local businesses fall on hard times, fail and close. As in every crisis, a calm, guiding hand is required to minimize loss, maximize value and perhaps, to find an opportunity to build for the future. The JMBM Special Assets Team™ provides experienced counsel to lenders holding troubled loans to motor vehicle dealerships and to draw on JMBM's broad expertise representing motor vehicle manufacturers, secured lenders and real estate investors to help find and preserve value.
The JMBM Special Assets Team™ represents clients' financial interests that are put at risk by failing vehicle, farm implement and marine dealerships. JMBM does not represent consumers, motor vehicle dealers or franchisees; instead, we provide expert guidance for:
• Manufacturers who must address the problems created by failing dealerships
• Secured lenders who must take prompt action to preserve their collateral or defend lender liability claims and class actions
• Investors who have leased sales and service facilities to dealers.
An asset-based lender must be prepared to sell the collateral to get the loan repaid. Often, the collateral is sold at auction, and it is essential that the lender be able to give access to the auctioneer and give the auctioneer plenty of time to set up and advertise the auction.
Borrowers often operate out of leased premises, so if the borrower goes out of business or files bankruptcy, it falls on the lender to deal with the borrower's landlord. Like the lender, the landlord probably has not been paid and is going to try to get the lender to cure the borrower's default. Faced with a recalcitrant landlord, a lender can find its costs rising dramatically as it debates the Hobson's choice between paying off the landlord and going to Court to gain access to its collateral.
Most asset-based lenders try to anticipate this standoff at the outset, when borrower, landlord and lender all are optimistic and willing to deal. JMBM Special Assets Team™ member Barry Freeman tells us why a lender ought to get a Landlord's Waiver and what terms ought to be included. Barry has a long track record representing asset-lenders and other secured lenders, as do many of us on the JMBM Special Assets Team™. If you are making, restructuring or collecting asset-based loans, give us a call.
From time to time, I've been asked to give in-house seminars for our lender clients about the mission of the Special Assets Department. The goal is to help relationship officers and workout professionals work together for the benefit of the institution. Many line officers are terrific are generating new business and at serving the good customers of the bank, but when a customer suffers a financial setback, the line officer may be faced with a problem he or she has not seen before and may not know where to turn for guidance. We've found that putting lenders and workout professionals together in a relaxed seminar setting generates terrific give and take and results in a camaraderie that works for the benefit of the bank.
Over the years, I've developed this PowerPoint presentation that outlines what a vibrant positive Special Assets Department can do for a lender. This brief outline shows how workout professionals play a positive role in operating and growing the bank, highlights the interplay with credit administration, legal and bank management and focuses on the mindset that is necessary to maximize value and minimize loss.
The JMBM Special Assets Team™ works closely with workout professionals on a daily basis. We understand the need to establish realistic goals and thoughtful action plans and to take the steps that are necessary to achieve the best possible result in a difficult situation. We put these time-honored principles to work in representing our lender clients deal with troubled credits. Give us a call when you are faced with a problem credit that requires legal counsel who knows the ropes and can get the job done.
Special Assets Lawyer.com: A Place Where Problem Loans and Troubled Debts Are The Topic of Discussion
Welcome to SpecialAssetsLawyer.com, a place where problem loans and troubled debts are the topic of discussion. I am Dick Rogan, bank lawyer and chair of the JMBM Special Assets Team™. Every day, problem loans of all types cross my desk and the desks of my colleagues here at JMBM. That's because we ask for them. Our clients are banks, special servicers, private lenders and others dealing with the fallout from the "Great Lending Bubble." Our clients challenge us to help them find value where all appears to have been lost. They rely on our collective years of experience to develop the right approach for each loan. Let's face it, our task is to work with our clients to make the most out of a bad situation.
Over the years, we've been asked by young people just joining a lender's workout team and by experienced lenders who have crossed over to the "dark side" of the bank to explain the tricks of the trade in dealing with special assets. In response, we created SpecialAssetsLawyer.com - a collection of some of our accumulated wisdom and a place for bank workout professionals to come find out what works when attempting to collect and deal with problem loans.