Here are some pointers for wrestling with your bank.
L ast month, I wrote about the credit market meltdown and how badly it has impacted large and small producers. But another disturbing trend we have witnessed the last six months is that of lenders putting borrowers into technical default over a breach of loan covenant to extract additional fees, higher interest rates, and additional scrutiny for lenders.
Frankly, I find this distasteful. Several times, we have been brought in on behalf of clients who often have never missed a single payment. The default arises through what is known as one or more “busted covenants.” This can be a drop in EBITDA (earnings before interest, taxes, depreciation, and amortization)- to-debt coverage, a common challenge everyone is currently suffering. Or it can be something as simple as being late in supplying financial statements.
Producers suddenly must deal with the added distraction of negotiating with one or more lenders seeking better terms than the original deal they cut during the good times. The drill looks like this:
First, you get a call from the bank, usually requesting a meeting as soon as possible (to create a sense of importance and urgency), where you are informed that your loan has been moved to Special Assets, effectively removing your relationship officer from the picture. That person is replaced with a harsh workout banker who is new to the loan and knows nothing about your business.
That meeting is followed by a letter confirming the lender’s actions, and often contains requests for a raft of additional information. Often the next meeting is scheduled at the bank’s law firm, at which point you have gotten nervous enough that you have brought your own attorney.
The lender unveils its new set of terms as a condition of continued cooperation, or “forbearance.” This demands that you hire a restructuring consultant, provide additional collateral, provide far more information than previously required, and pressures you to agree to asset appraisals, fees for the formal forbearance agreement, and at least a 2% interest rate increase (and often more).
Advice to remember
The process is fairly canned. We have seen the same approach and almost the exact same documents presented by lenders to their borrowers who find themselves in a distressed situation. Here are some key points to keep in mind:
- Acknowledge they are the creditor – Humility goes a long way. Acknowledge you are the debtor; they are they creditor. Be as transparent as possible.
- Offer more information than you are required to provide – If you require only financial statements, offer to provide them with 2009 budgets, backlog information, any recent valuations on the company, benchmarking surveys in which you have participated, and as much additional financial information as possible. • Negotiate the terms of their forbearance
- Negotiate the terms of their forbearance agreement – Everything is negotiable, but be fair. If you have additional collateral and they know it is unencumbered, offer it if you are certain the company can’t mortgage it to inject fresh new dollars into the business. Ask for as much time as possible to restore compliance with the original loan terms.
- Play chicken – If you are convinced your business can recover, make sure they know early in the negotiations that liquidation isn’t an option, and that the company will seek Chapter 11 protection if necessary.
If you find yourself in a corner with your lender, seek professional advice from your lawyer, CPA, or a professional restructuring firm that can help you buy the time you need to recover.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at firstname.lastname@example.org or telephone 985-727-4310.
© 2009 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “The loan default shakedown” (The Concrete Producer, April 2009) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “The loan default shakedown” under license from Hanley Wood, LLC.