The Negotiating Table
Lenders and Borrowers Meet Halfway to Solve Financial Troubles
Steven L. Ingleby, Scott M. McCullough
December 1, 2008
In the face of the nation’s worst financial blow-up since the Great Depression, there are numerous business scenarios depicting those caught in the storm, such as a real estate developer finding that a sudden decline in lot sales is jeopardizing the viability of his or her 20-acre subdivision, or a young technology business on a high-growth trajectory now experiencing a reduced line of credit.
Each of these businesses is faced with the dilemma of how best to deal with problem loans in the heat of the financial crisis. In years past, lenders were quick to foreclose when borrowers defaulted on their loans. But in today’s economy, lenders are far less interested in taking collateral and more willing to help borrowers pay with a “loan work-out” or debt restructure. There are no easy answers to these complex problems, but the following guidelines can be solutions to help both lender and borrower.
Watch for Warning Signs
Even if your business or your borrowers seem to be navigating the troubled waters of the current financial downturn, be keenly aware of the early warning signs of problem loans: Are sales falling? Are collections down? Are customers stretching out payments? Is the business slowing down payments to creditors? Are there staff cuts? Has the value of collateral fallen? Is the business in default under other loans?
Too many borrowers wait too long to open a dialogue with their lenders in hard times. If you see a rocky road ahead, assess the true nature and extent of your problems, formulate a workable plan for dealing with them and contact your lender early about your problems and your plan. Don’t wait until the opportunity for effectively dealing with your problems has past (when the lender has begun sending demand letters) and liquidation is the only alternative left. Moreover, once you have started down the workout path, do not procrastinate putting the work-out plan in effect under the assumption that time and the eventual turn in the market will cure all your problems.
Many borrowers wrongly assume that if they lay out their problems to their lender, the lender will just call their loan due. That is often a wrong assumption. Especially in troubled times, lenders are keenly aware of their borrowers’ problems. If your lender is, or can become comfortable with the belief that you can ultimately pay off the renegotiated loan, lenders may see that it is in their best interest to restructure your loan.
It seems axiomatic that borrowers will be scrupulously honest when they want to negotiate a workout with a lender. But many experiencing trouble are tempted to fudge the facts, withhold information or embellish the truth. Lenders, under the stress of troubled loan situations, can also be tempted to be less than honest. Even though work-out negotiations often proceed in an atmosphere of anxiety and uncertainty, it is imperative to the positive outcome of the process that both borrowers and lenders come to the negotiating table with an attitude of disclosure and a commitment to honesty and integrity.
Gather Accurate Information
For a work-out to succeed, it is vitally important to know the true and current facts about the borrower and the loan at the beginning of discussion. While past financial statements, title reports, surveys, appraisals, inventory accountings and other reports are helpful, new information should be obtained as soon as possible, making it so decisions can be made and plans formulated based on the latest and most accurate information. Also, make sure you gather and read the original loan documents and security agreements, and look for any modifications and extensions on them.
Establish a Plan
Use the information you have gathered and find answers to some of the following key questions: What caused the borrower’s problems (a bad market, mismanagement, dishonesty, etc.)? Is the borrower’s business/project still viable? Does the borrower want to keep the business/project going? Is the borrower’s work-out plan feasible? Is an orderly liquidation the best solution?
Both borrower and lender need to arrive at the answers to these questions and formulate the work-out plan. A work-out plan may include a reduction in the loan interest rate, a reduction in the monthly payment amount or a change of other terms in the loan.
Bring in Outside Help
There are a number of professionals—CPA’s, consultants, attorneys and workout specialists—that cut their teeth in the many work-outs of the 1980s and early 1990s. These professionals have the depth of experience to provide legitimate help during the current real estate and financial downturn. Lenders are particularly interested in having a third-party’s objective view on the facts of the situation and in formulating the workout plan. On the other hand, beware of the many newly self-proclaimed “experts” looking to make money from generating reports, analyses, studies and plans who do not have the knowledge or experience to do so.
Steven L. Ingleby is a shareholder with Callister, Nebeker & McCullough. Steve can be reached at firstname.lastname@example.org
. Scott M. McCullough, Esq. is an associate at Callister, Nebeker & McCullough. Scott can be reached at email@example.com