In a previous post we discussed the benefits of having a troubled borrower retain a “turnaround consultant.” To recap, a lender requesting (or potentially requiring) a borrower to hire a turnaround consultant is helpful in a number of ways, including:
- Providing the borrower with a level of analytical sophistication as to the causes and remedies for its financial difficulties which a borrower may lack internally.
- Providing the lender with a contact point with the borrower who speaks the same language as the lender.
- Providing the lender with reliable financial information and the types of reports lenders need in workout situations (such as 13-week rolling cash flow projections) which a typical in-house controller or CFO may not be familiar with or have the time or resources to prepare.
- Directing a borrower on a positive and effective path to cure its financial woes.
In this month’s post, we address a similar situation but from the perspective of a lender who may wish to hire its own workout consultant to assist in dealing with a troubled loan situation. In the recent past, credit quality for lenders has been unusually good and workouts often have been resolved by a payoff or refinance. Now we seem to be entering a more difficult banking environment with higher interest rates, shrinking demand, and tightening credit, so the options to resolve troubled loans are more complex and need to be expanded. An experienced third-party workout consultant can provide the credit skills required to quickly identify problems and provide multiple options to address less-than-ideal circumstances in a specific loan relationship. Such a consultant may also bring to the table the temperament and experience suited to dealing with a borrower in a stressful situation that a line officer with a pre-existing relationship with the borrower may not have. As a result, a workout consultant may be able to achieve a mutually agreeable resolution of the troubled credit or the ability to execute a plan of liquidation. A workout consultant has the experience to advise the lender whether a defaulted loan can be salvaged, whether a borrower can be turned around, and whether there is a viable exit strategy.
In the past, sub-standard loans were downgraded and immediately transferred to the lender’s “Workout Department.” At one time, such departments were a staple of most, if not all, institutional lenders. However, due to improved credit standards and a strong economy over the years, such departments have in many instances faded away and lenders may no longer employ experienced in-house workout officers. This makes the benefits of hiring an outside workout consultant more appealing to a lender for many of the following reasons:
- Since the consultant was not part of the original lending and underwriting decisions for a downgraded credit and does not have any ties to the loans at issue, the consultant likely will be more objective in assessing the true status of a troubled credit, any weaknesses that exist, and how to best protect the lender’s interests.
- The use of a workout consultant also avoids the challenge of the new business lender who made the loan switching hats and converting from being a “salesman” to a “liquidator.”
- Consultants can provide detailed projections and realistic timelines for various scenarios such as bankruptcy, other less formal insolvency proceedings, note sales (to investors or third-party operators) or OREO management that accurately outlines the options for resolving a problem loan and potential disposition of foreclosed collateral.
- Consultants have the time to focus on a troubled situation more fully than a perhaps over-burdened line officer or credit department. Workout consultants typically understand market conditions in a specialized way that can assist a lender with a dual track strategy (i.e., possible settlement while taking the steps necessary to be poised for a liquidation) that maximizes the options for a loan resolution. The experienced consultant also has the ability to adapt quickly to changed circumstances and to recommend alternative approaches to the lender.
- Consultants can help the lender analyze and possibly avoid workout solutions offered by a borrower, its advisors, or other outside parties that have a low probability of success. At times, where the likelihood of a borrower’s survival may be a lost cause, deferring to a borrower’s plea for more time to refinance, find an investor, or to find a buyer often results in wasted time and energy for a resolution that will never be achieved.
- Consultants have experience in assessing and responding to possible lender liability claims that are often raised by a borrower to distract from and delay the resolution process. These types of claims, if asserted in a lawsuit, are costly to defend and could result in triple damages and an award of attorney’s fees under Massachusetts law if the lender is found liable.
- Consultants speak the same language as the experienced workout attorneys hired by the lender (or recommended by the workout consultant) and can often more effectively help in the transition of a credit to a workout attorney if that step becomes necessary. A lender will typically reduce its legal expenditures when directing the communications with the lender’s workout counsel through a workout consultant due to their shared knowledge of the process.
- Consultants are typically well versed in the regulatory requirements in regard to troubled credits, including those related to preserving and enforcing SBA loan guaranties. They are often also known to the FDIC thus providing a level of comfort to regulators that the lender is taking the necessary steps to address troubled loan situations. Consultants can suggest ways to restructure loans that are acceptable to regulators and avoid creating an “evergreen” non-performing credit.
- A lender may not have the need for a full-time loan officer dedicated to workouts. Hiring a workout consultant, usually a former workout officer at a bank (or banks), on a temporary or part-time basis, can be an effective and cost-efficient alternative to hiring a full-time workout officer.
- Unlike a turnaround consultant, it is the lender who hires and pays the workout consultant and for whom the consultant works. Depending upon the circumstances, including the provisions in the loan documents, the services rendered by the workout consultant, and whether the credit is in bankruptcy, the cost of such a consultant can often be treated as a cost of collection recoverable from the borrower.
- Consultants are often very helpful in performing a detailed document review after an acquisition or merger of another lender or a loan portfolio to assess the strengths, discrepancies and the sufficiency of the acquired loan documentation.
Workout consultants hired directly by the lender are a great resource for a lender that does not have full-time managed assets or sufficient workout capacity. They are useful in addressing, advising, and resolving troubled credits and bring a wealth of experience to a lender who may be focused primarily on new loans and community involvement. Our attorneys have worked with a number of workout consultants and would be happy to assess a troubled loan situation and suggest who may be the best resource for the given situation.
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.