2013 RMA School of Commercial Lending

• Classifying Problem Loans• Facts About Problem Loans• Major Causes of Business Failures• Troubled Industries• Primary Cause of Loan Loss• Financial Warning Signs• Analyzing Problem Loans• Objectives of the Workout Process

• Watch• Special Mention (OAEM)• Substandard• Doubtful• Loss• Other Real Estate Owned (ORE or OREO)

• Non-accrual loans

• Incompetent Management (6th “C” of credit)• Lack of Managerial or Technical Expertise• Ineffective/Inadequate Systems and

Controls• Neglect• Lack of Performance Oriented Goals• Failure to Consider Capital Requirements• Product/Service “Life-cycle” Impact• Disaster• Regulatory Environment

• Residential Real Estate • Mortgage warehousing/Hard money • Look at Your Bank’s “Undesirable” Loan List• Second and Third Tier Industries to RE• Airline/Transportation• Restaurants• Hospitality/Golf/ Reliant of excess

disposable income• Always be careful of the “bullet” loan

• Poor Initial Assessment of Risk• Timidity• Over lending• Documentation Flaws• Failure to Implement Approval Terms and

Conditions• Loans Granted to Bailout Other Lenders

(Greater Fool Theory)• Failure to Obtain and Analyze Interim Financial

Statements• Fraud

• Deterioration in the Borrower’s Cash Position

• Dramatic Change in the Mix of Accounts Receivable and Inventory (watch your days on hand)

• Revaluation of Assets on the Financial Statement

• Multiple Liens on the same bundle of assets• Increased Sales and Decreasing Margins• High Dividend Payout

• Request for Credit Restructures• Debt Servicing Difficulties (late pays/ODs)• Conversion of Trade Debt to Notes Payable• COD• Unpaid Taxes or Insurance (personal and

corporate)• Rapid Growth in Plant or Equipment• Mismatch in Asset Funding

1. Document Review (including insurance)2. Lien Search and Collateral Valuation (appraisal?)3. Financial Analysis

*Does the core business generate positive cash flow before debt service?

4. Related Debt Search*Dealing with secured and senior position creditors

5. Evaluation of Operations6. Evaluation of Financial Problems7. Evaluation of Environmental Issues8. Survivability Analysis

*Why is the company in financial difficulty and can that be resolved?

9. Initial Workout Plan*Three basic options: 1) out of court “workout”; 2)Chapter 11 restructure; 3) liquidation

Borrower Objectives◦ Sale of Business or Project◦ Maintain Control◦ Survival◦ Fending Off Creditors◦ Recapitalization and Turnaround

• Lender’s Objectives– Improve Collateral Position– Improve Documentation*Assignments *Jury Trial*Doc Stamps and intangible tax *Insurance*Covenant Compliance *Trusts*Guarantor Consent *UCC’S*Current Corporate Structure *Trusts*Forbearance Agreements– Elimination of Debtor Defenses– Improve Pricing

Consideration of All Available Options Must Be Able to Monitor the Plan Clearly Defined Objectives and Goals Flexible Based on Complete, Current and Accurate

Data Should Allow for Re-documentation

Prepared by Legal Counsel

• Prejudgment Remedies– Right of Offset– Replevin (the recovery of collateral upon default;

requires a court order writ of replevin)– Injunction (a writ granted by a court whereby one is

required to do or to refrain from doing a specified act)– Attachment (allows creditors to seize personal

property pre-judgment ; generally used if debtor is in the process of or about to fraudulently transfer or conceal property)

• Loan Sale• Bankruptcy Considerations• Foreclosure/ Repossession– Deed in Lieu– Assignment of Rents