Your Loan has been Assigned to Special Assets … Now What?
This typically happens when the banks assessment of the credit risk of the loan is determined to be above the risk that can be handled in the normal course of business. Either the bank and/or its regulators have determined the loan to be a troubled loan.
Classified As Distressed …
The borrower may have missed payments, breached its loan covenants, or appears likely to do so in the near future. In any case, the loan has been classified as distressed and the bank has decided to bring in is specialists that know how to exit a loan.
These individuals understand all of the banks rights and how and when to push the right buttons to maximize the banks recovery. Be aware that rarely will a loan in workout be returned to the performing loan portfolio. The bank has its eye on the exit door and it’s just a question of how long it will take to get there.
So, Now What?
So, what now? First, if you even suspect that you might be a candidate for Special Assets, especially if you have missed a payment or are out of covenant, get out in front of the issue with your bank. Ask about your banks process when a borrower begins to experience difficulty. What are the triggers for your institution in transferring a loan to workout?
If your loan is asset based, expect that your lender will notch up the reporting requirements that relate to the collateral. If a cash flow loan, expect more frequent requests for a 13 week cash flow projection and explanations for variances of actual to projections. Updates may be required as often as weekly.
With a distressed loan, the bank will be more focused on cash flow rather than financial statements during the crisis period. Your lender will want to know that you can meet payroll and other critical cash needs without additional borrowing and that it will remain adequately protected by the collateral.
Almost Without A Doubt …
Almost without a doubt, your borrowing costs are going to increase. There are fees for granting waivers or forbearance, expenses for the preparation of new documents and perhaps an increase in the interest rate. These expenses are imposed when the company can least afford the expense; but from the lender’s perspective it is compensation for the increased risk and costs of lending to a company in distress. Assuming that the company finds a new lender, expect that lenders who are more risk tolerant will charge higher rates.
What Can You Do?
What can you do? There are a number of things that will help to both mitigate the situation and get your company on the road to a new loan.
1. Conserve Cash: Put aside your thinking about GAAP profit and think cash. Don’t be concerned with depreciation, accruals and other non-cash factors. Establish a starting point and track cash from that point. Use your cash flow projections as a tool for making the changes that you need to make to insure the business is cash flow positive. Cash is the life blood of the business as you go through this period and you need to pay close attention.
2. Develop a Plan: The first thing to determine; is the base business viable in both the short and long term, If so, figure out what it will take to stabilize the business and how to achieve that goal. Make sure that your plan is doable and that you can demonstrate to a lender exactly how you will achieve it. Most borrowers approach a lender with an optimistic plan that, even if they get the new loan, begin to miss in the early loan period. That is almost guaranteed to have a replay of the situation with your old lender. If there was ever a place to under promise and over deliver, this is it.
3. Hire Competent Advisors: You may look at this as a contradiction to conserving cash. But there is a whole discipline of locating the right lender for the company and developing a plan that meets that lender’s requirements as well as making the changes in the company that makes certain the company meets that plan. Additionally, the terms for most lenders are negotiable and unless you have experience and credibility in negotiating with lenders, it is not a do it yourself project.
It’s Likely That Your Bank Has …
It’s likely that your current bank has reached the point of “lender fatigue” and no matter how well-crafted and executed your plan is, your current lender will not want to retain your loan.
Do not let wishful thinking cause you to wait for the bank to either pull your loan or give you an unreasonably short time to find another bank. Concurrent with everything else your company needs to do, work with your advisors and begin a search for replacement financing immediately.