Even in a good economic environment, there are always changes in circumstances that can result in distressed loans. Sometimes, the borrower has failed to meet a financial covenant, missed a payment, or suffered a material adverse change in assets or financial performance. In most situations, it is important that lenders work with their attorneys in a step-by-step approach to assess and mitigate the risk.
Consider these four practical suggestions for lenders assigned a distressed loan.
1. After reading the file, meet with the line officer to get his/her perspective on key factors such as: the quality and timeliness of past financial reporting; the company’s willingness and ability to work with the lender to be part of the solution; and whether ownership can bring value to the table in the form of capital and/or knowledge. Basically, start to determine if you can really trust the numbers going forward.
2. Next, meet in person with the borrower and guarantors with their legal counsel at the lender’s counsel’s office. During this session, read the borrower’s body language to decide if he/she is stressed, straightforward or evasive. Assess if the borrower exudes confidence that the financial and performance projections are credible. Evaluate whether the borrower’s professionals are experienced in workout matters.
At this meeting, highlight the seriousness of the distressed situation and assess the borrower’s approach along with his/her willingness and ability to resolve the problems. And, of course, as the lender, be sure to clearly articulate your requirements for a workout.
3. Ask your attorney to review the loan documents. This review should be comprised of a number of elements including a search for federal and state tax liens and a UCC-11 report. Your attorney should advise you if the loan documents are assignable and, if so, if an assignment is limited to a “financial institution.”
Other variables to consider in this step are whether the borrower owns any intellectual property and whether the lender’s interest in it is perfected. Likewise, are there commercial tort claims and, again, are you perfected?
4. Consider asking your attorney to conduct a comprehensive litigation search to determine if there are suits filed against the company. Assess the risk posed by the litigation. Are there restraining orders in place? Is the litigation insured? What will be the impact on company operations? Can the borrower afford to pay for a vigorous defense? Confirm that there is directors and officers liability insurance in place. During this step, it is vital to make a concrete plan for the worst case scenario.
While distressed loans certainly come in all shapes and sizes, our team at DiOrio Law is known for digging in with a practical and thorough approach. Loan officers today, even in a strong economic marketplace, should expect team-oriented representation and, when appropriate, aggressive advocacy from their attorneys both in and out of the courtroom.
To learn more, contact Joe DiOrio here.