Académique Documents
Professionnel Documents
Culture Documents
NOV/DEC 2010
VOL. 8, NO. 8
Loan economics are just one of many factors influencing the workout bankers decisions in the complex
arena known as commercial bank workouts. Workout bankers in many commercial banks manage risk, not
just loans. Kristina Anderson continues her discussion on de-mystifying the workout bankers motivations.
I
KRISTINA L. ANDERSON
Managing Director,
Carl Marks Advisory
Group LLC
workout banker may also ask that the company close some
or all of its accounts with the bank.
Changes to treasury processes could impact a company
both financially and operationally. For example, if a bank
terminates ACH services, a company may be unable to provide
direct deposit of payroll. The company would need to create
and mail physical payroll checks and maintain idle balances
in bank accounts to fund unpredictable check presentments.
These procedures could add cost and consume liquidity in
comparison to direct deposit, as well as change the operational procedures associated with payroll payments. In addition, employees may consider it an inconvenience to go to the
bank with physical paychecks, which could impact morale.
It is advisable for a company and its professionals to
review the agreements that govern treasur y ser vices and
consider the potential operational and liquidity impacts if
changes to those services become necessary.
Reputational Risk
Loan Pricing
What is a workout banker trying to tell a company when it
raises pricing? A pricing increase could certainly be economically driven an attempt to cover the increased capital
expenses associated with an identified problem loan.
However, the workout banker could also be trying to give
a company a reason to find another lender. Pricing a loan
above prevailing market rates often provides a solid economic
incentive for a company to leave the bank voluntarily if it can
find another willing lender.
Litigation Risk
Institutions have differing views regarding accepting litigation
risk. There are quantifiable staff and legal costs involved with
simply being engaged in litigation, in addition to reputational
considerations, regardless of whether the bank is the defendant or plaintiff. Some institutions will avoid litigation risk
at all costs, while some will make a financial decision to
accept litigation risk where the expected financial outcome
Book Balances
Banks are required to periodically conduct an analysis of
the value of their identified problem loans. If the loan is
found to be impaired, a bank may write down the loans
balance on the banks books. It is a myth, however, that a
workout banker will be motivated to accept any payment
that will clear the remaining book balance of a loan if that
loan has been written down.
While internal write-downs change the value of the loan
on the banks books, they do not reduce the borrowers
legal obligation to pay. By asking the bank to take a
discount, a company is asking a bank to pay to incur
expense to make the problem go away. A workout
banker will generally view a request to forgive principal,
interest, fees or reimbursement for out-of-pocket expenses
similarly, as each requires the bank to incur an expense it
is not contractually obligated to bear.
The workout bankers decision as to whether or not
that expense is justified is often independent of the loans
book balance. A company and its professionals need to
convince the workout banker (who, in turn, will probably have to convince one or more managers or internal
committees) that any proposal requiring the bank to
discount any amount it is owed represents the highest
and best value that can be achieved from all the realistic
strategic alternatives.
2010 Xander Media Group, Inc. ABF Journal is an Xander Media Group (XMG) publication. The views and opinions expressed in this publication throughout are not necessarily those of XMG management.
Reprinted with permission from ABF Journal, Nov/Dec 2010, Vol. 8, No. 8 by IPA Publishing Services 800-259-0470 (12079-1210) For web posting only. Bulk printing prohibited.