Preparing for An Economic Downturn

Some analysts have been forecasting that there will be an economic downturn in the next 18 months. What measures can you take now to mitigate your risk and/or exposure if and when this downturn occurs? Wendy Simkulak, Partner, Duane Morris LLP, discussed strategies for evaluating and managing risk and exposure from origination through and after a default during the latest installment of RMA’s Credit Risk Management Audio Conference Series

In 2017, the number of corporate bankruptcies remained flat and public company bankruptcies decreased. Filings have remained flat throughout 2018 with the exceptions of the retail and energy sectors which continue to suffer. However, these numbers may be changing as Simkulak’s conversations with bankruptcy lawyers have revealed an uptick in business. With the threat of an impending downturn, what actions should be taken to protect the institution’s interests if and when a borrower experiences financial difficulty or defaults?

When dealing with a borrower verging on or in bankruptcy, Simkulak advised getting all documents pertaining to the loan in order, collecting amounts due, and drawing on collateral. Once a borrower does default, Simkulak advised executing on a guaranty, agreeing to forebear or restructure the loan, filing a foreclosure on real property, or repossessing assets on personal property.

Vigilance is key to mitigating risk. Monitor the financials of borrowers and when those appear to be tracking poorly, follow the company closely. Simkulak said that institutions’ legal teams should have access to a national database on borrowers who have filed for bankruptcies. Staying on top of at-risk borrowers is critical in order to minimize the institution’s exposure.

Join us for the next installment of the Credit Risk Management Audio Conference Series on January 8, Construction Lending Update.

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