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.
Most of the attendees at this conference are either chief credit officers at California banks or other senior executives who are actively involved on the credit side of the bank. These men and women are well aware of the systemic problems they face in dealing with their customers. They agree that for the most part, in this cycle, it has been unusually difficult to successfully workout credits unless the assets that are pledged as collateral have stabilized in value.
Earlier today, one of the conference attendees related the story of a customer who had gone so far as to file a bankruptcy case and an adversary proceeding (a lawsuit in bankruptcy court started by a bankruptcy debtor) to try to “save” an unfinished property valued at only 60% of the loan. This is not desperation – it is fantasy. This borrower has decided to spend what little good money he has to retain control of a project that he cannot possibly complete because he will run out of cash!
It’s not a pretty situation for anyone involved, but all that will be accomplished is several months delay and tens of thousands of dollars in legal fees and expert witness fees that might have gone toward finishing the project. Borrowers like this remind me of dogs who chase cars. It may be exhilarating while the chase is on, but you know that the dog has never stopped to consider what he would do with the car if he actually caught it!
There is a little good news, though. Bankers here in Southern California report that residential projects are coming back to life, and that builders who have located financing are acquiring good projects at much lower pricing than would have be available just 24 months ago. Sales remain slow and the trendline is still flat, but at least we are hearing anecdotal evidence of these green shoots.
A few of the attendees who have been through previous downturns agreed with my assessment that this cycle has presented lenders with troubled deals that were properly underwritten, well administered, made to competent business people who are honest – yet still these loans failed because asset values fell so precariously or because income streams simply stopped. In past cycles, we all recalled that asset values may have dipped, but not to the extent we are seeing today.
In giving my program today (it repeats tomorrow), I was struck by the thoughtful questions posed by the conference attendees. Many came up after the program and shared some of their thoughts and approaches. But everyone concurred that without the stabilization of values and sufficient cash flow, workouts remain extremely tough.
My program focused on the need to gather the facts before making a decision as to the course of action that the bank will take. We went over several examples of critical information about a borrower’s business that couldn’t be known to a workout professional without a face to face meeting, a site visit and some study of the industry and the individuals involved. We also explored alternative approaches that might be taken, and we went through the various tools in the toolshed that we call the special assets department.
There is no magic solution or right way for every deal. Our goal, as workout professionals, is to get the bank paid in full as soon as we can for the lowest cost. Our job is not simple, and every deal is not the same as every other deal. That’s part of the attraction in doing this work – to solve the puzzle. It is gratifying to succeed in working with a customer to save her business, but it is also satisfying to get the loan collected against all odds. Either way, it takes hard work and careful thought to move the deal forward.
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.