Loan Workouts: The Renegotiation Process

by A. Barry Cappello

Mar 1, 2000

(TMA Global)

Businesses with troubled loans are in a unique position today. In the 1980s and a good share of the 1990s, lenders were quick to foreclose on non-performing loans. Now, with the economy in an extended boom period, lenders are much more inclined to work with borrowers that experience temporary financial troubles rather than face the prospects of adding non-performing debt to their bad loan portfolios. For businesses that need extra time or relaxed loan terms to resolve relatively minor financial problems, a loan workout is an appealing option. The key is to negotiate the most favorable new terms without compromising your legal rights.

Deciding to Renegotiate

Deciding whether renegotiating a loan makes sense for the company is the first step one should take before approaching a lender. The alternatives—losing collateral, facing foreclosure, filing for bankruptcy—are not appealing. However, if renegotiating a troubled loan will still not enable the company to pull through its tenuous situation, there is no sense beginning the process. "Buying time" is not a viable reason to approach a lender with a workout plan. Have an outside CPA review the company’s financial records to determine if a more attractive interest rate or a grace period will be enough to salvage a loan. If not, it may be time to face reality and hire a business law attorney to represent the company through legal proceedings.

If there is a legitimate possibility that the loan can be kept current with new loan terms, the best time to approach the lender is before the company falls behind in loan payments. Lenders may not be happy to hear that a borrower is having financial troubles, but they would rather be told before a loan is 60 days or more past due and their calls to the company go unanswered. Contact the lender about the company’s situation before the lender begins sending past due notices and threatening letters.

Prior to meeting with the lender to begin workout discussions, the company will need to prepare materials convincing the lender that extending loan terms is in its best interest. The company must compile financial data including detailed profit and loss information, assets and liabilities, inventory (if applicable), marketing data, short-term (three-to-six months) and long-term (six months-to-three years) cash flow projections and a business and marketing plan that shows how the business will meet its current and future financial obligations. Almost as important, the company must explain why the current financial problems exist and outline a realistic game plan will ensure that the problems will be corrected and not recur.

The company’s accounting department should be able to prepare the financial documents. Another helpful source is a loan consultant, often a retired senior bank loan officer, who knows what lenders are looking for in workout plans.

Lenders also look at a company’s management team when evaluating whether to renegotiate a loan. They look at its experience, commitment to the company, honesty, integrity, long-term business planning ability and competency. Once the materials are compiled, be prepared to act quickly. Every week that goes by without contact with the lender will hurt the company’s cause.

Often, borrowers come to the negotiating table with their hat in hand, ready to accept any new terms offered by the lender. This is not advisable. Accepting terms that will not help the company through the financial rough spots but will only delay the inevitable is of no value. Determine ahead of time the new loan terms that will enable the company to pay back the loan in a timely manner. Know in advance what will work and what won’t. Once these are determined and the financial and marketing materials are compiled, it is time to plan a meeting with the lender.

Liability of the Lenders

Although financial institutions have become much more vigilant in respecting borrowers’ rights, some lenders still make mistakes that lead to a borrower’s financial problems. Courts have ruled that lenders are accountable when lender misconduct adversely affects a borrower’s financial position. If lender liability is present, a company can negotiate a new loan from a stronger position. Faced with a legitimate lender liability claim, financial institutions may be much more willing to negotiate favorable new loan terms with the damaged borrower.

Signs of lender liability include lender conduct such as forcing the business to operate in a certain manner to keep borrowed funds flowing; adding new loan conditions after the business has accepted the original terms; improperly using acceleration or demand clauses; failing to provide adequate notice before changing the way it does business with the borrower; calling a loan due without giving a company time to find a substitute lender and putting off the loan process or holding the borrower in limbo so an unreasonable amount of time passes and the business suffers as a result. If the lender sees that its conduct is suspect, it will most likely want to renegotiate a loan to avoid a possible lawsuit.

Lenders know that borrowers at a workout negotiation are in a vulnerable position. The entire business may be riding on whether the negotiations are a success. A typical concession lenders seek from borrowers is the insertion of an arbitration clause in the new loan documents that waives the company’s right to a jury trial. Lenders may also demand that the borrower waive its rights to any lender liability or other claims against them. Before agreeing to these concessions, the company must consider the ramifications (i.e., forgoing any ability to seek future legal recourse against the lender).

During workout discussions, everything is negotiable—interest rates, monthly payments, length of the loan, collateral, payment schedules and technical loan covenants (i.e., debt to equity ratios). Lenders usually try to obtain additional security or collateral for the new loan to better protect themselves from default. Companies should be firm on what they are willing to give up to receive better loan terms. Putting up personal property or investments of the company’s principals (i.e., a residence or real estate), for example, should only be considered if the principals are willing to lose the collateral if the worse case scenario plays out.

Depending on the complexity of the workout, a company may need an entire set of new loan documents or it may only need some amendments to existing loan agreements. Regardless, the company should be prepared to pay renewal or rollover fees to the lender for changes in the loan terms. If the lender requires the services of an attorney, the lender will often require borrowers to pay any lender’s attorney’s fees.

As is always the case, borrowers must make sure that all of the lender’s oral promises or commitments made during the negotiations are documented in writing in the loan papers. Without written documentation, those oral promises may be worthless when the company later tries to hold the lender to them.

Thorough preparation, a realistic short-term and long-term turnaround plan for the company and tough negotiation skills are critical if a company is to succeed in the workout process.

A. Barry Cappello
Managing Partner
Cappello & McCann

Cappello regularly represents borrowers in lender-borrower disputes and workouts. He is also the author of Lender Liability (LEXIS Law Publishing).

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