If the Special Assets group gets in touch, you should be concerned, because something is up. Your relationship with the bank has changed. Special Assets is a specialized unit within the bank. They’re tasked with the job of managing problems that have cropped up. Like your loan. When a loan lands there, the bank has usually lost faith in it and may be ready to say goodbye to you as a customer. You moved from being a customer - someone the bank wanted to retain and nurture - to being a problem to resolve. The bank is now focused on recovering what it can, not on keeping you as a client. More than anything, the transfer means your place on the parking lot has changed. And it will never be the same again.
This is a scary time. There is a lot at stake. Some companies come out of Special Assets stronger, and others don’t survive it. Understanding the process matters, because the more prepared the company is, the better the odds they will survive the process.
A Missed Payment Isn’t the Only Path
Just because you’ve had a perfect track record of timely payments doesn’t mean that they don’t have a right to start treating you as a risk to them. The bank could classify your loan as in default. Yes, that means a missed payment isn’t the only path to the Special Assets department. Besides repayment, most loan agreements require you to send the bank financial statements on a schedule, keep certain asset-to-debt and coverage ratios, protect and insure the collateral, and not allow any other liens without the lender’s consent. It’s a private contract between you and the lender. You make your statements and you keep your ratios as set forth in the agreement. So you could be a good customer, paying your bill every month, but if you don’t submit your paperwork correctly, the bank can move you to Special Assets. Covenants are no joke, but they are a frequent cause of defaults. With an asset-based loan, where your borrowing base is built on receivables and inventory, you might have even more requirements, along with close monitoring by the lender.
The Workout Banker
Once the file moves, your old relationship manager, and even the senior officers you know, will have little to no say over what happens to the account. They are walled off from the workout. Now understand - this is not about personal judgment. It’s about economics. The new officer may well be cordial at first, but avoid taking that demeanor as a sign that the workout banker is not going to be overly aggressive. The bottom line is that he or she is not there to help you but to make sure the bank gets its money. Many banks pay their workout staff in a way that creates strong incentives for them to do that. It encourages them to cut losses rather than preserve the bank’s relationship with the borrowers. The bank is focused entirely on protecting their money, not rebuilding the relationship.
So how do you deal with them? Start with credibility. Lost credibility is often what put you there in the first place. Workout bankers have learned that the sweetest-sounding promises are often the most treacherous ones. Be honest, and be sure to be up front about your problems right from the beginning. If you are not, they will tend to fill in the gaps with their own worst case scenarios. Under-promise and over-deliver. Bankers don’t want surprises.
Next, remember that money is never more important than when it is scarce. Collect slow receivables, cut expenses, sell nonessential assets, and drop unprofitable units or product lines. You may have to book losses as assets are written down to market value, but the cash matters more than the losses, because holding on to a money loser is a losing game. Every day that you delay reducing your spending and diverting capital from unprofitable ventures, you are burning up one of your most precious resources, cash. And unless you negotiated it in advance, you may not be able to count on the bank to extend you more credit.
Then put together a business plan, and make it conservative, give them plenty of wiggle room. Your performance will be measured against it. Whatever figures you give them can be used against you, so it should be realistic and defendable. Unexpected changes in the books are going to attract far more attention than planned ones. Report accurately and on time. Get them convinced that you’re realistic, and they’ll be more willing to suggest things you could be doing better.
At the same time, work on alternative financing. Few businesses go from Special Assets back to regular banking at the same lender, and the bank will want your refinancing options well defined before it agrees to any long-term forbearance. Having options in hand will help convince the bank that you have a viable exit strategy. So if you are in Special Assets now, start looking, and quickly.
Be wary of short-term or one-sided deals. Workout bankers like to “incrementalize” a borrower, turning up the pressure a little at a time. “We’d be happy to do that,” says the workout officer, “if we just had a little more security. If you could give us a personal guarantee on this note, we’d keep forbearing,” and so on. Give in to every request and they can actually back you into a corner. You should only agree to increase the collateral or sign a guarantee when you get a fair restructuring of the loan that gives you a realistic chance of repaying it. That might mean adequate credit line availability, default waivers, revised covenants, longer amortization or a lower rate. If they won’t give you any flexibility on the loan itself, then you shouldn’t have to do the guarantee. Push back, too, on rolling 30-day extensions. A short fuse keeps you on the hook for compliance, and the practice also short-circuits your budgeting by keeping you ready and willing to respond to demands and providing them with more opportunity to micromanage. Aim for six months or longer, with reasonable performance hurdles.
Expect to pay more for everything. Many banks raise the rate and add fees at every opportunity. One reason is that, from the bank’s side, there’s more likelihood that they’ll have to foreclose and become involved in a dispute if you don’t pay. So they’re adding extra risk and an extra chance that they’ll have to spend money to deal with your loan. The other is that they hope you will take your loan to another lender. Workout groups also use lawyers and advisors freely, at your company’s expense, and lawyers bill by the hour, so the fees can add up quickly. Keep some control over that spending.
Through all of it, stay focused. The operational team typically has a strong urge to hide from the Special Assets team, which for a business owner translates as running away from their role as CEO. When this happens, the rest of the business is often left to flounder without a leader. The way out is to make a plan, the best you can at the time, and then hit it. If performance turns the corner, doors open to financing that lets you leave Special Assets behind.
Get help. Special Assets work is usually difficult and time-consuming. Special Assets requires complex negotiations with a lot of moving parts. You could easily lose control of the situation and miss out on important details. Experienced attorneys are essential, and a financial advisor can make the process go much smoother and more efficiently, build the bank’s confidence and position you to refinance. The most important thing to do is get help, so don’t hesitate. Even if you aren’t sure if it’s worth the cost, it usually is.
The Credible Threat of a Filing
Finally, Chapter 11 is the backstop. In nearly every workout, the credible threat of a filing, and what the bank would likely recover in one, is what gets Special Assets to negotiate fairly. That’s where the real power lies. The threat of Chapter 11 causes them to open up. Filing stops most enforcement actions and gives the business a breathing spell that will allow it to reorganize its debt. It also gives borrowers many protections and shifts leverage their way, which is why workout bankers dread it. Bankruptcy is the tool for holding everyone else’s feet to the fire. Even if you hope to avoid it, know its pros and cons. A successful workout happens in its shadow.
