ABA Banking Journal - July 2008 - (Page 32)

COVER STORY A. loan into workout? Tom DeVine says, along the way, if the bank has given some ground, exercised some forbearance, modified the contract, what have you, it should receive a chip in return. This is a “release and waiver of claims.” Simply put, by granting this, the borrower and the borrower’s guarantors each release and waive any claims and other related rights relating to the lender in the course of the loan or any workout agreement. (At the same time, the bank generally does not waive any of its own rights.) “You want to make sure that you have a clean trail behind you,” says DeVine, “that you have not left your bank open to a counter-claim from the borrower.” This measure isn’t foolproof, DeVine acknowledges, because a borrower might claim that the agreement was signed under duress. However, one helpful fact is this, according to DeVine: “There isn’t a lot that lenders are obligated to provide to borrowers under loan documents, except to provide funds.” The experts also agree that it is extremely important, prior to getting into discussions with the borrower, to ensure that the loan file is in order. The bank needs to make sure all security agreements and other documents have been executed properly, and that everything that should be documented has been. “You want to be sure that you have all the rights in the collateral,” says DeVine. Sometimes, items are missing, but all is not lost. These holes can sometimes be filled by horsetrading with the borrower, according to O’Leary. “Honey will attract more flies than vinegar,” O’Leary says. “If I need the customer to do certain things to improve the bank’s position, then I’m probably going to have to negotiate and trade and concede and compromise with them. But I find that, generally speaking, if you treat the customers like gentlemen, they will respond like gentlemen.” O’Leary looked for the quid pro quo, where he could. “‘I’ll renew you for 90 days and give you a little more time, if you’ll help me cure this little documentation omission’,” is one example from O’Leary of the dealing that can go on when all wish to cooperate. Q. A. Both borrower and lender must accept where things are, now, and be willing to deal with what the problem is, says Evans. No workout plan can progress until both sides have reached that acceptance. What philosophical shift should we be making, as a loan goes into workout? Don’t expect logic to be the only guiding force, or even the main force, when a loan heads into workout. “You are dealing with human beings,” says attorney Steve Turner, “and human emotions drive the decisionmaking.” When the workout borrower is a small company, recognize that the owner’s life and livelihood is likely going down the tubes, Turner explains. He is chairman of the Financial Transactions Section and the Bankruptcy and Financial Dispute Resolution Group at Baird Holm, LLP, Omaha, Neb. From the bank’s side, there is often also an emotional element. Turner says lenders frequently feel betrayed by the borrower and may go into a workout with a “scorched earth” attitude. At the outset, emotion may have the bankers involved thinking of not only forcing the operation into liquidation to salvage all the value they can, but also suing any guarantors who signed onto the deal. Put that aside and think logically, advises Turner: “The best advice, early on, is to understand what your deal is, and what will get your bank the best return.” Banks with special asset departments, with bankers who did not have a previous relationship with the troubled borrower, typically operate very professionally and focus on best returns, Turner says, and other banks can do well to emulate their example, even if they don’t employ a full-time workout officer or team. What about the borrower’s mindset? “The borrower has got be a realist,” says Dick Evans of Frost Bank. Getting a borrower to understand that life has changed and that they are in trouble is similar to a person dealing with the four stages of death: denial, anger, sadness, and acceptance. Q. A. The story at the start of this article makes workout sound like a pretty nasty business. Does it get that bad? Much of the atmosphere of the workout process will hinge on the state of the bank itself, according to Ed O’Leary. Some institutions he worked for were in regulatory difficulties, had less flexibility, as a result, and had to WORKOUT continued on page 40 More Credit Help From Our Website Among the business credit related resources you’ll find on www.ababj.com: Podcasts from our interview with Ed O’Leary, veteran lender and workout specialist, full of war stories and straight talk. (Caution: Not for the squeamish.) Debuting soon: a credit blog that will be hosted by Ed O’Leary. The blog will specialize in helping with, and discussing, bank credit problems and issues, with an emphasis on business banking. Ag credit expert Steve Turner talks about recoveries from troubled producers at www.ababj.com //content/view/236/74.) Q. A. Sell those bad loans? Hows, whys, why nots, and more in our Digital Magazine of August 2007: Nxtbook.com/nxtbooks/sb/ababj0807/ index.php?startid=18 32 JULY 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.bairdholm.com http://www.bairdholm.com http://www.ababj.com http://www.ababj.com//content/view/236/74 http://www.ababj.com//content/view/236/74 http://www.nxtbook.com/nxtbooks/sb/ababj0807/index.php?startid=18 http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - July 2008

ABA Banking Journal - July 2008 Contents Editor’s Column Searching for New Paradigms at BIS Snapshot: C&I Asset Quality 100th Anniversary: Then & Now BofA "Event Concept" Wins Awards, and Customers ABA Resources ABA Chairman’s Position M&A: Beat Today's Market Blues Pass the Aspirin Cover Story: Workout Time Correspondent Banking: No Longer Just a Handshake Business Getting IT Right By Thinking It Through Webnotes Are You "Red Flag" Ready? Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - July 2008

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