Bank Workout/Special Assets group: 5 doís and doníts.
Workout/Special Assets Groups are an integral part of any bank’s loan operations. With a strong leader, this group can greatly improve a bank’s ability to mitigate problem loans. Too often, though, in an effort to remedy a problem loan situation, the group becomes entrenched and holds onto the loan too long. To make the loan go away, in many cases, means the department recommends writing down or writing off the loan. In both cases, the bank’s reserves are increased impairing its ability to loan on more profitable ventures.
There are other options open to this group many times overlooked because it is not part of their training or corporate culture. Perhaps, the belief is the debtor has no chance of survival. Another possibility, especially in times of economic stagnation, is the workout group is near its capacity to examine and work through the volume of criticized loans outstanding.
We will argue there is potentially a more expeditious and beneficial methodology for the group that can be spelled out in five do’s and don’ts.
- Do identify and move criticized loans quickly
- Do have a designated workout specialist identify the problem company’s probability of survival
- Do separate high probability of survival from low probability of survival companies as quickly as possible
- Do identify 5 or 6 outside consulting groups to recommend to management of companies and insist they engage one of the consulting groups as a condition of moving forward
- Do require continued communication on the progress of each company with a consulting group engaged
Let’s look at the importance of each of these points. The quicker you are able to anticipate a company is having a problem, the higher the probability the company may be able to pull through its problem. Many times companies mistakenly believe that the problems they face are external in nature and once an economic rebound occurs, they will be fine. Historically, this belief is true in less than 10% of cases. The hard reality is management may well be the cause of the problems but cannot or will not admit it.
Each workout specialist should go beyond the numbers presented by management and dig into the viability of the company to assess its likelihood of survival. While this may be more intensive and time consuming, a clearer picture of the increased risk and exposure to the bank warrants the effort. Once a determination is made as to viability, the workout specialist can prioritize the loans by probability instead of size. If viability is suspect, the specialist should insist the company engage a consultant group within 30 days or have the loan called. If viability is probable, the specialist can work with the company to mitigate the problem.
If a consultant is engaged, the bank should require a viability analysis by the consultant to determine if a turnaround is possible and the length of time projected to complete the turnaround. Alternately, if the bank is not keen on keeping the business as a client and would rather they move, the consultant should indicate refinancing is the direction it will pursue. Regardless of which path, regular updates to the situation should be made by the consultant group to the specialist.
Now, the don’ts of the Workout/Special Assets Group:
- Don’t wait to see if circumstances will improve for the company, act quickly.
- Don’t report month after month the company says things are getting better if no tangible improvement is witnessed, i.e., covenants are intact, loan is becoming current, are inventory and accounts receivable improving or worsening, are they on target with their projections
- Don’t let the loan sit without analyzing the company’s viability
- Don’t wait to develop a list of potential consultants to recommend
- Don’t recommend less than three consultant groups to a client.
These are fairly straightforward. If you wait to see if circumstances improve you are likely to be too late on the viability curve. If you are receiving the same story each month from the company without verifiable changes, you will have more difficulty collecting each successive month. If you are not analyzing the viability probability, you are not giving yourself the benefit of the tools available to remedy the situation. Also, a strong list of 10 to 15 consultant groups is essential so you can pick the four or five groups with the proper disposition, knowledge and experience to help the customer.
Finally, you should always recommend at least three consultant groups to protect the bank against lender liability issues. While you can insist the company engage a consultant and recommend consultant groups to contact, limiting the number to one or two has negative consequences for the bank if the consultant group somehow mucks up the engagement or if the client/customer believes the consultant group did.
There are benefits to following this prescription that may not seem counterintuitive. By prioritizing by viability versus loan size, the risk committee is able to quickly determine if loans will need to be written down or off and the necessary reserves allocate. By insisting on engaging a consultant group early in the process instead of later services the company better since a determination can be made on what will happen to the client and whether the bank will be repaid. Also, by engaging a consultant group sooner, the workout specialist is freed up to work with other customers with a better likelihood of working out of this area and becoming a productive customer again.
Capital Consulting Network, LLC. is a