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-Raymond J Rotella
- Esquire at Kosto & Rotella, P.A.

Firms with problem loans should adapt to bank rules

By Brett D. Fadeley
Special to Orlando Business Journal

If you are an owner of a small to medium-sized company and have ever had the unpleasant experience of a downturn in your business, you may have discovered how difficult it was to renew your loans with your bank.

It should have made you wonder why your banker who used to take you out to lunch, to Magic games and to play golf suddenly was trying aggressively to get you to move your relationship to another bank.  Before you knew it, you had a new banking officer in something called the special assets department.
What used to be a friendly and warm environment suddenly may have become icy cold.  Meanwhile, you are asking yourself why the bank has gotten all  upset simply because your company lost  a little money.  Well, allow me to ex-  plain.  You have just entered the Banking Twilight Zone, and I know all about it because I used to work there.

I am not trying to make light of what potentially can be a very serious matter.  After all, we are talking about your business, and you personally may have guaranteed the debt.

However, the special assets department doesn’t have to be such a scary place.  It’s just foreign to the friendly style of banking you previously experienced.  What’s more important is how you got there and how you are going to get out.
Special assets has been around for  some time, but it became prolific during the most recent recession.  It’s nothing more than a specialized problem loan department.  Historically, commercial and real estate loan officers would manage their entire loan portfolio even after a  loan would go bad.

However, properly managing a problem loan can be extremely time consuming, which can take the loan officer away from producing new quality loan relationships.  Also, it often requires considerable interaction with attorneys and specialized knowledge in such areas as documentation, liquidation of collateral and bankruptcy.

By 1990, the most recent recession was heating up.  Many companies were struggling, and numerous real estate projects had gone bad.  Banks had to post huge reserves to offset potential loan losses, and the backs of many banks  were be-ginning to break under the  weight.

Some of the large banks quickly respond-ed by assembling centralized special assets departments whose only mission in life was to clean up all the loan problems.

If your company was losing money  and you started to get behind on your payments, your loan relationship might have been transferred to special assets.  This takes the pressure of restructuring  the relationship off the friendly loan officer.  It’s also an effective negotiating tool for the bank because it now can use  a “good guy, bad guy strategy.”

Banks are required to evaluate constantly the risks associated with their loan portfolio.  As the financial con-dition of one of their commercial borrowers deteriorates, banks typically undertake a process of loan risk classification.  When this happens, banks often have to post reserves commensurate with the new level of risk, and this adversely affects their profitability.
So you now can appreciate why a bank is motivated to fix or exit a problem loan relationship as quickly as possible.  The bank’s capital is tied up in your bad loan, and it will want it redeployed into other quality income producing assets.
Perhaps you are telling yourself this is interesting information, but how does that help me if my commercial loan ever goes bad at my bank?  The key is to come in with a legitimate and viable exit strategy (i.e., a takeout loan) or a plan that will cause the loan relationship to become rehabilitated within a reasonable period of time.

Stick to the business issues and don’t spend any time talking about your long-standing and historically good relation-ship.  At this stage, all of that history is irrelevant, and any discussion about it probably would be unproductive.
The bank wants to see that you have acknowledged and identified your busi-ness problems and that you have devel-oped a plan to fix the problems.  Do not create lofty projections that have no quantifiable or rational basis.  You need to realistically support why your plan will remedy the problem quickly.
Also, asking he bank for interest rate relief at this time is probably not a good idea.

From the bank’s perspective, the risk of loan repayment has gone up, and the bank will want to be compensated for that increased risk.
On occasion, the bank may consider taking a discount to exit the relationship. However, always remember that the problem loan work-out officer has the obligation to maximize the return to the bank to increase shareholder value.
Therefore, the bank likely will evaluate whether it is in its best interest economically to accept a discount or to proceed against the guarantors and/or liquidate the collateral.

Sometimes, given the time value of money and the potentially significant costs of collection, a bank may adopt the old axiom “a bird in the hand is worth two in the bush.”

As you can see, managing your own problem loan can be a very different and difficult process.  You will need to adapt quickly to the changed conditions and rules of the relationship to increase your chances of achieving a successful re-structure or discount.

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