As we maneuver through the financial crisis brought on by COVID-19, financial institutions may find business customers facing uncertain financial futures and seeking relief on their debts, whether through a structured workout or a bankruptcy proceeding. When a borrower’s financial future is in doubt, or it is facing insolvency, the account is usually transferred to a workout specialist, but community and regional bank bankers who are not workout specialists should know the basics to navigate the troubled credit process.
During RMA’s recent Risk Readiness Special Coverage Webinar, Mairi Luce, Partner, Duane Morris LLP, an attorney who specializes in workouts and bankruptcy law, explained what bankers should do in the workout phase to maximize recovery and minimize the risk on a troubled loan, as well as the measures that should be taken prior to a bankruptcy brought on by COVID-19.
The pandemic has created a unique situation in which borrowers who may have been strong a few months ago are suddenly facing difficulties. Luce advised that the best place to start is to apply tried and true best practices and principles to ensure a troubled loan does not turn into lender liability. She indicated that bankers should determine the best course to minimize institutional risk and assess the probable end at the start, i.e. the various ways in which the bank can get repaid, asset sales or transfers, earnings from operations, equity infusions, take-out loans, or sale of the loan or credit.
Luce suggested a pre-workout/pre-negotiation agreement to avoid lender liability. The agreement is not a waiver of any right or remedy and it’s not a promise of a workout; it’s merely an opportunity to negotiate. The basic provisions include a disclaimer of tax, legal, or business advice and the borrower’s acknowledgment of access to legal advice. The workout/forbearance is another option which enhances collateral position, sharpens default and remedy provisions, addresses identified problems, and makes a clean break into the workout/wind-down phase of a borrower’s loan cycle.
For more information, listen to the recording available for download here.