Business bankruptcy filings have dropped by more than one-third over the last five years. One potential reason for this drop is that lenders have increasingly sought non-bankruptcy solutions for defaulted or distressed loans. Virtually all non-bankruptcy solutions involve some form of “workout.” Below are some practical tips for lenders to consider both before and during a loan workout.
- Have a plan. A lender does not want to incur significant legal fees, make protective advances and/or take up significant time that could be used on other matters to simply kick the proverbial can down the road and end up in the same place where it began, or worse. If a lender enters into a workout program with a borrower, the lender should have some end game in mind, whether that is a long term modification, note sale, giving the borrower time to find alternate financing, or simply shoring up the lender’s position in advance of a foreclosure. Even if a lender pursues multiple tracks, having at least a potential end game scenario in mind will guide decision-making and avoid wasted effort.
- Ask for help. Does your borrower operate in an industry in which you have little experience or that involves specialized knowledge? Consider engaging an industry expert on a consulting basis. The expert will see things you that won’t and can also help you determine whether pushback from the borrower on certain issues is warranted or not.
- Don’t push it. The more control that a lender exerts, the more risk it runs for a possible lender liability claim. A secured lender can properly exert a significant amount of control by simply exercising its rights under the loan documents and applicable law. But a lender should be wary of pushing things too far and look for ways to allow the borrower some latitude where possible.
- Clean up after yourself. Did you miss a piece of collateral when you originally drafted the security agreements? Did you fail to file all of your financing statements? Is there a new equity owner who could provide a personal guaranty? This is your chance to fix anything that was previously missed or improve your position with regard to security and other matters. And at every stage of a workout (discussion letter, forbearance agreement, etc.), obtain a broad written release from the borrower and guarantors to the extent possible.
Each workout situation is unique and the best course of action will vary based on the specific situation. But the concepts outlined above are universal and will help maximize the chances of a successful workout.