Both Sides Now
Borrowers and lenders must face the music with a plan.
In today’s still-dodgy economic environment, it is more necessary than ever for commercial real estate borrowers and lenders to take some key steps before approaching loan restructuring negotiations. Neglecting this critical prep work can scuttle your chances of success even before you reach the negotiating table. No matter which side of the table you’re on, preparation is the key. The following considerations offer advice for both sides.
Five-Step Borrower Plan
For borrowers, facing a potential loan restructure is tough but not impossible. These steps help borrowers widen their focus to see their specific situation in context of the big picture.
1. Be totally objective regarding your restructuring needs. This is not the time to just think you know where you stand and hope for the best. Take off the rose-colored glasses and face the reality of your situation. Lenders are dealing with many, many borrowers in similar straits, so there is no need to be shy about putting the facts on the table.
2. Take action early. Don’t assume that your situation will improve. Many borrowers who delay find that their liquidity has become so constrained that it limits their ability to complete a successful restructure. At best, restructures take 60 to 90 days to complete; they often take much longer.
3. Think like a lender. As you develop your plan of action, consider how you can approach the negotiation in a way that benefits the lender. Remember, lenders have more options than borrowers do, such as demanding repayment, foreclosure, involuntary bankruptcy, and suing on guarantees in order to get their money back. If you can’t show your lender how your proposed restructure is in its best interest, the proposal very likely will be rejected.
4. Take into account all of the lender’s issues. For lenders, a loan restructure is not a pure business solution. They also may be dealing with regulatory, accounting, and loan loss reserve issues, as well as other factors beyond the loan and its security. It is strategically wise for borrowers to take these lender issues into account as they prepare for negotiations. Otherwise, it will be harder to put together a deal that makes sense for both sides.
5. Compare the potential loan restructure to the outcome of filing a Chapter 11 bankruptcy. This is the benchmark against which you should measure all of your preparatory work. It doesn’t make sense to pursue a loan restructure if filing a Chapter 11 will leave you better off in the long run. Your lender also knows this and that could affect the success of your negotiation. So if you can qualify for a Chapter 11, don’t rule it out as a possibility.
Lenders, too, must come to the table with solid preparation and a clear game plan. Here are four considerations for successful negotiation from the lender’s perspective.
1. Determine your objectives. Just as borrowers need to start off with a realistic understanding of their situations, lenders need to know upfront what they want from each particular borrower. Is the objective to make sure that the loan conforms to regulations? Is it to turn a nonperforming loan into a performing loan? Is it to separate from the borrower at all costs?
In most cases, the lender’s goal will be to recover the maximum amount of money or to restructure and roll over a loan that is prudent from a risk point of view and that makes sense from a profit point of view. However, if choosing to restructure, the loan must withstand today’s tighter regulatory scrutiny. Knowing your objectives will help to guide your approach to the negotiating process, from conciliatory to aggressive.
2. Consider your options for resolution. Lenders want results that yield the maximum return from their loans. So if you think there’s still a business for the borrower, negotiating a restructure of the loan is the best option. However, don’t disregard the possibility that litigation or other remedies may be more effective in meeting the ultimate goal.
3. What is your own financial status? Lenders facing financial difficulties benefit from shrinking their balance sheets. If you are in that situation, achieving the maximum repayment from the borrower may not be your primary goal after all. In that case, your optimal outcome could be foreclosure, a deed in lieu, or other remedies that get the asset off your balance sheet as quickly as possible. Afterward, if there’s a guarantor on the loan, you can work on defining and settling on a deficiency. While this approach won’t maximize your recovery, it will help you come into compliance with capital adequacy ratios and meet other regulatory requirements.
4. If you’re considering foreclosure, be brutally realistic about the true recovery value of the loan. In mid-2010, the market for commercial real estate is still in disarray. Some markets are beginning to find the bottom, while others will continue to slide throughout the rest of this year. Either way, few transactions have occurred over the past year. So if you’re anything less than utterly realistic in your analysis of the potential for the loan, you may find yourself sitting on more foreclosed real estate-owned property for significantly longer than you want.
Commercial loan modification negotiations can yield positive results for both borrowers and lenders. Know yourself, know the business climate in which you’re negotiating, and know your options. For borrowers in particular, the assistance of a financial restructuring professional can make the difference between a positive outcome and a poor one.