Commercial real estate is recovering, albeit slowly, with transactions and lending likely to experience more modest growth across a number of property types. Regulators encourage banks to engage in loan workouts and make it more inviting to do so — promising that a well-crafted workout will not be a black mark on a bank’s record.
Guidance from regulators
When the financial regulators— including such entities as the Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC), among others —speak, banks listen. Guidance from the regulators dictates that borrowers may be considered creditworthy, even if they face diminished cash flows, depreciated property values and protracted sales and rental absorption periods.
The regulators encourage cautious and sensible loan workouts, declaring that they serve the best interests of the lender and the borrower. These workouts also serve to boost corporate financing opportunities. The regulators have stated that those banks that cautiously review the borrower’s finances to determine their ability to repay will not be criticized for restructuring loans, even if those loans receive an adverse credit classification because of certain weaknesses or because the underlying collateral is worth less than the amount of the loan.
The lender’s view
There are a number of ways to provide relief for a troubled loan, including renewal of the terms of the loan, offering additional credit and restructuring. From a lender’s perspective, the strategy that is chosen should enhance a borrower’s ability to repay the loan and not compromise sound banking and accounting practices.
In this regard, lending institutions are encouraged to gather the following information:
- Updated borrower, project and guarantor financials
- Current appraisals of the collateral for the loan and workout plan
- The guarantor’s income, available cash, liabilities, credit rating, outstanding guarantees, and performance on previous guarantees as evidence of the guarantor’s ability to fulfill their obligation
Bank examiners are asked to consider the following:
- The character of the borrower and their financial condition, resources, and re-payment record
- The quality of the protection offered by business cash flow or other available collateral in the context of the borrowers total debt picture
- The quality of the guarantor and the guaranty
Borrowing strategy
All of the considerations that inform loan restructuring decisions depend upon the accuracy and depth of the information provided and the transparency of the borrower in conveying the information. The guidance provided by the regulators makes it apparent that they consider sound loan workouts desirable and achievable. However, structuring an acceptable workout is not simple, and is best undertaken with the advice of a seasoned corporate financing attorney before proceeding to any discussions with the lending officer.
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