LendingCon, which brings together a diverse group of lenders, has just concluded.
GRP President Rick Patel and Managing Director Krishan Patel both participated in a seminar called “Lending Workout Plans.” They discussed defaults, forbearance and loan maturity.
Here are some of the key points of their remarks:
Market Conditions Affecting Lending Workout Plans
Q: What’s happening in the borrowing marketplace in the last 12-18 months?
A: Borrowers are showing confidence, and anticipate interest rate reductions in the next several years. On the other hand, the lending market has tightened up in several sectors, particularly hospitality. Some borrowers are exploring private credit, when possible. In addition, business operators are keeping an eye on inflation, which is “sticky” right now. As a result, entrepreneurs are restructuring and monitoring costs.
Q: How common are lending workout plans?
A: Defaults and lending workout conversations are becoming more common. This is particularly the case in distressed markets, like San Antonio, Austin, the Northeast and even certain Florida locations. Higher leverage clients are facing the greatest risk. And borrowers with maturing loans can struggle to find financing. There are delinquencies in several businesses: lodging, multi-family and office space. But we are heartened that many owner-operators are turning to lending workout plans rather than delinquency.
Lending Workout and Early Interventions
Q: What signs indicate that a loan is headed towards trouble?
A: Right away, we look for declining revenues. These start a cascade of problems including dipping into reserves. Then a business will start to exhibit operational indicators of distress, including poorer customer experience, decreased employee satisfaction, etc. If these issues don’t resolve, the issues magnify: franchise payment delays, payroll struggles, continued depletion of any cash reserves. And then finally, you will see inability to service debt.
Q: What should borrowers do when they feel their loan is at risk?
A: Borrowers should initiate open communication with lenders early, ideally two to three months before operational cash flow issues arise. Borrowers should share detailed cash flow projections and budgets. It’s critically important for borrowers to start this process before the first payment is missed. Once a loan is in default, the lender has already lost trust in the borrowers.
Q: What information do lenders need to create a lender workout plan?
A: Solid information about due dates for big bills like insurance, taxes and franchise fees is critical. Absolute honesty about total debt (especially debt taken on after a mortgage) is also crucial. Finally, realistic projects and budgets are a must.
What should borrowers avoid doing?
- Don’t wait to talk to your lender.
- It’s a mistake to over-leverage during periods of instability.
- Do not continue to borrow funds from family or other sources to sustain a declining asset.
- Bad business decision: expanding operations despite negative financial trends.
- Lacking a concrete recovery strategy could be distrastrous. Don’t rely on hope. Take action instead.
What are some possible lender workout plans?
- Deferments and interest-only periods can offer relief. However, most lenders will not offer this assistance if a payment has already been missed.
- Greater lender control, like requiring CD reserves or requirements for achieving and maintaining certain debt coverage ratios.
- Loan modification, often easier to accomplish with SBA loans.
- Be aware that lenders can be constrained in their workout plans by regulatory pressure and their own institutional rules.
- Private credit can be enticing in certain situations, but it comes with a price.
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