2013 RMA School of Commercial Lending

Classifying Problem Loans

Facts About Problem Loans
Major Causes of Business Failures
Troubled Industries
Primary Cause of Loan Loss
Financial Warning Signs
Analyzing Problem Loans
Objectives of the Workout Process

Watch
Special Mention (OAEM)
Substandard
Doubtful
Loss
Other Real Estate Owned (ORE or OREO)

Non-accrual loans

Incompetent Management (6th C of credit)

Lack of Managerial or Technical Expertise
Ineffective/Inadequate Systems and
Controls
Neglect
Lack of Performance Oriented Goals
Failure to Consider Capital Requirements
Product/Service Life-cycle Impact
Disaster
Regulatory Environment

Residential Real Estate

Mortgage warehousing/Hard money
Look at Your Banks Undesirable Loan List
Second and Third Tier Industries to RE
Airline/Transportation
Restaurants
Hospitality/Golf/ Reliant of excess
disposable income
Always be careful of the bullet loan

Poor Initial Assessment of Risk

Timidity
Over lending
Documentation Flaws
Failure to Implement Approval Terms and
Conditions
Loans Granted to Bailout Other Lenders
(Greater Fool Theory)
Failure to Obtain and Analyze Interim Financial
Statements
Fraud

Deterioration in the Borrowers Cash

Position
Dramatic Change in the Mix of Accounts
Receivable and Inventory (watch your days
on hand)
Revaluation of Assets on the Financial
Statement
Multiple Liens on the same bundle of assets
Increased Sales and Decreasing Margins
High Dividend Payout

Request for Credit Restructures

Debt Servicing Difficulties (late pays/ODs)
Conversion of Trade Debt to Notes Payable
COD
Unpaid Taxes or Insurance (personal and
corporate)
Rapid Growth in Plant or Equipment
Mismatch in Asset Funding

1.
2.
3.

Document Review (including insurance)

Lien Search and Collateral Valuation (appraisal?)
Financial Analysis

*Does the core business generate positive cash flow before

debt service?

4.

Related Debt Search

*Dealing with secured and senior position creditors

5.
6.
7.
8.

Evaluation of Operations
Evaluation of Financial Problems
Evaluation of Environmental Issues
Survivability Analysis

*Why is the company in financial difficulty and can that be

resolved?

9.

Initial Workout Plan

*Three basic options: 1) out of court workout; 2)Chapter 11

restructure; 3) liquidation

Borrower Objectives

Sale of Business or Project

Maintain Control
Survival
Fending Off Creditors
Recapitalization and Turnaround

Lenders Objectives
Improve Collateral Position
Improve Documentation
*Assignments
*Doc Stamps and intangible tax
*Covenant Compliance
*Guarantor Consent
*Current Corporate Structure
*Forbearance Agreements
Elimination of Debtor Defenses
Improve Pricing

*Jury Trial
*Insurance
*Trusts
*UCCS
*Trusts

Consideration of All Available Options

Must Be Able to Monitor the Plan
Clearly Defined Objectives and Goals
Flexible
Based on Complete, Current and Accurate
Data
Should Allow for Re-documentation
Prepared by Legal Counsel

Prejudgment Remedies

Right of Offset
Replevin (the recovery of collateral upon default;
requires a court order writ of replevin)
Injunction (a writ granted by a court whereby one is
required to do or to refrain from doing a specified act)
Attachment (allows creditors to seize personal
property pre-judgment ; generally used if debtor is in
the process of or about to fraudulently transfer or
conceal property)

Loan Sale
Bankruptcy Considerations
Foreclosure/ Repossession
Deed in Lieu
Assignment of Rents