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RMA-SOCL:  Problem Loan Management (Bill Stanton & Terri Thomas)
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RMA-SOCL: Problem Loan Management (Bill Stanton & Terri Thomas)



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  • 1. 2013 RMA School of Commercial Lending
  • 2. • 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
  • 3. • Watch• Special Mention (OAEM)• Substandard• Doubtful• Loss• Other Real Estate Owned (ORE or OREO)• Non-accrual loans
  • 4. • 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
  • 5. • 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 disposableincome• Always be careful of the “bullet” loan
  • 6. • Poor Initial Assessment of Risk• Timidity• Over lending• Documentation Flaws• Failure to Implement Approval Terms and Conditions• Loans Granted to Bailout Other Lenders (Greater FoolTheory)• Failure to Obtain and Analyze Interim FinancialStatements• Fraud
  • 7. • Deterioration in the Borrower’s Cash Position• Dramatic Change in the Mix of AccountsReceivable and Inventory (watch your days onhand)• Revaluation of Assets on the Financial Statement• Multiple Liens on the same bundle of assets• Increased Sales and Decreasing Margins• High Dividend Payout
  • 8. • Request for Credit Restructures• Debt Servicing Difficulties (late pays/ODs)• Conversion of Trade Debt to Notes Payable• COD• Unpaid Taxes or Insurance (personal andcorporate)• Rapid Growth in Plant or Equipment• Mismatch in Asset Funding
  • 9. 1. Document Review (including insurance)2. Lien Search and Collateral Valuation (appraisal?)3. Financial Analysis*Does the core business generate positive cash flow before debtservice?4. Related Debt Search*Dealing with secured and senior position creditors5. 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 11restructure; 3) liquidation
  • 10.  Borrower Objectives◦ Sale of Business or Project◦ Maintain Control◦ Survival◦ Fending Off Creditors◦ Recapitalization and Turnaround
  • 11. • 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
  • 12.  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 byLegal Counsel
  • 13. • Prejudgment Remedies– Right of Offset– Replevin (the recovery of collateral upon default; requires acourt order writ of replevin)– Injunction (a writ granted by a court whereby one is required todo 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 orabout to fraudulently transfer or conceal property)• Loan Sale• Bankruptcy Considerations• Foreclosure/ Repossession– Deed in Lieu– Assignment of Rents