THE WORKOUT WINDOW: Razing Some Fed Flags

In each issue of The RMA Journal, veteran workout leader Jason Alpert gives tips on thorny workout challenges.

QUESTION: On a recent outing to inspect a small office building, I discovered that the building was gone. My customer had razed it. All that was left was a vacant dirt lot with a sign declaring that a new car wash was coming soon. We reached out to the customer immediately and, after several attempts to connect, they finally responded, saying that they had lost all their tenants and that the new “highest and best use” was to put in the car wash. The loan was still paying out as agreed, but now the customer wanted an interest-only construction loan. What should we do? 

JASON: Immediately transfer the loan to your workout group and engage outside counsel. The lack of communication from the customer is unacceptable. They have already defaulted on several major conditions of the mortgage, and you now are under-secured given that there is no longer a building on the site. You need to default this loan now and this untrustworthy customer needs to find a new lender ASAP. 
 

Faulty Electronics 

QUESTION: I have a $1.1 million line of credit to an electronics distributor that has about $950K outstanding, secured by accounts receivable and inventory. A/R turns increased to 65 days (up from 20) and days-on-hand inventory tripled to 180 days. The customer also reported losses last year and doesn’t believe there will be improvement over the next year from a cash flow perspective. How should we treat this upcoming renewal? 

JASON: Since you didn’t mention a real estate loan as part of this relationship, I assume they do not own the space they are using to operate and store the inventory. At renewal/modification, then, you should obtain a landlord waiver (if you don’t already have one) so you have access to the inventory that secures your loan should your customer stop paying their lease or file bankruptcy. The DOH tripling is a major red flag. Given the industry, you need to ask why they aren’t moving inventory and whether the inventory itself is at risk of obsolescence. This deal demonstrates distress and should be sent to your workout group. The resolution should focus on shoring up documents and terming out the portion of the debt that is not revolving. If there is any hard collateral (equipment or any related real estate) you should seek to secure the line ASAP. Good luck!  
 

Losing Faith in a Church Loan 

QUESTION: My portfolio has a $700K church loan that is well secured at a 55% LTV. We are in a small community and the pastor of the church died two years ago, resulting in a 60% decrease in giving units. The church can no longer afford the loan payments. How do we resolve this situation without harming our ability to do business in this community? 

JASON: Lending to churches or nonprofits is always rife with risk, especially from a reputational standpoint. These loans are often non-recourse and foreclosing a church (in the absence of outright fraud) can be very detrimental to the long-term ability of the bank to do business in the community (even if the church is not well attended). In restructuring a church loan, you’ll need to get church leadership to recognize the problem and to accept professional financial assistance, even if it means increasing the scope of work their CPA typically provides. Additionally, the church should establish a finance committee to establish budgets and periodic statements that the bank will require in any restructuring agreement. I would also consider right-sizing payments to what they can afford short-term and bringing in the maturity or having an expiration period when loan payments go back to normal and support the full debt. Hard discussions might need to take place regarding selling non-critical assets (excess land/vehicles) and cutting services, missions, or even pastor/staff salaries. The church might also want to consider leasing out space to groups and organizations to generate cash flow, or even spinning off services such as day care or schooling. God willing, you can find a win-win solution for the church!  

Have a question for The Workout Window? Email Jason at jason@castlebarholdings.com or reach out to him at 813-293-5766. Jason is managing partner at Castlebar Holdings, a distressed debt fund and financial institution advisor. Jason led and managed workout and special asset teams at major financial institutions for two decades. He is on the editorial advisory board of The RMA Journal and is an adjunct professor at the University of Tampa. 

Disclaimer: The Workout Window is not intended nor is it to be considered legal advice. As The Workout Window stresses, consult with legal counsel and your institution’s management to be sure you are acting within the parameters of your institution’s policies and banking law.