28
Wisconsin Community Banker
March/April 2014
COUNSELOR
’
S CORNER
Reduce Risk, Maximize Return
Why an Asset Management Plan Should Be a Priority
Jason E. Kuwayama, Godfrey & Kahn
A
bank client asked me to review a
letter of intent from a company
that was interested in purchasing a
sub-performing
loan from them.
The loan was fac-
ing a maturity
default after years
of forbearances
and modifications.
The letter required
that the borrower
remain in business
as a condition to
closing the loan purchase—a fair con-
tingency for a loan secured only by the
assets of a going concern.
But it was too late.
The day after we received the let-
ter of intent, the borrower closed its
doors, and the bank was left with, at
best, a 10 percent recovery based on a
liquidation of its borrower’s inventory.
The resulting loss exceeded one mil-
lion dollars.
This bank’s experience underscores
the need to have a well-developed
asset management plan.
An asset management plan is not
necessarily an “asset disposition” plan.
While an asset sale strategy continues
to be effective for some banks, it is not
necessarily the ideal strategy for other
banks or for all impaired credits.
Although many banks survived the
post-Lehman apocalypse, the “walking
dead” economy highlights the need to
create a credible and thoughtful man-
agement plan for your entire portfolio,
including assets that might not appear
yet on your watch list.
Developing an Asset Management Plan
When developing an asset man-
agement plan, think critically about
your portfolio generally and each loan
specifically. What’s your end goal for
each credit? Why are you entering
into a forbearance agreement? Is the
forbearance agreement delaying the
inevitable? Is this borrower coopera-
tive? Thinking critically requires you
to consider the foreclosure and litiga-
tion costs, the carrying costs, and the
future accounting losses.
For example, if your collateral con-
sists of a flagged hotel, then it might
not make sense to initiate a foreclo-
sure if, in the end, you are left owning
and operating a hotel (because the
foreclosure and carrying costs will
be considerably high). On the other
hand, if your collateral consists of
rural land, then you might consider
foreclosure.
Here are a few tools to consider
when exploring options for your port-
folios and distressed credits:
Asset Sales
Asset sales remain a popular option
for loans that already are impaired
or written down. The market for
non-performing and sub-performing
loans is robust, with pricing regularly
between 50 and 80 percent of the out-
standing principal balance (depending
on asset quality and collateral type).
The best note sale candidates
still leave the purchaser with some
options. In the example at the begin-
ning of this article, the bank waited
too long to sell the note successfully.
A common misconception is that
note sales are, or can be used only as,
a last resort. Rather, they are strategic
dispositions for credits that would be
difficult to rehabilitate due to financial
regulations, accounting rules, or a
general lack of cooperation from the
borrower.
Although asset sales are not guar-
anteed to bring the highest proceeds
on a per-loan basis, the transactions
are almost always cash-only with
quick closings, resulting in an imme-
diate paydown and corresponding
improvement to your NPL ratio. For
the past two years, many banks have
achieved net recoveries on their bal-
ance sheets due to asset sales.
Forced Collateral Management and
Borrower Analysis
Some borrowers actively work to
refinance, recapitalize, or substantially
pay down (or pay off) their loans.
Unfortunately, finding a new lender or
capital partner can be costly and time-
consuming. And the process is further
complicated or delayed by the daily
demands dictated by the borrower’s
financial condition.
When dealing with a cooperative
borrower, especially where the col-
lateral consists primarily of the assets
of a going concern, consider hiring an
outside consultant to review historic
cash flows and financials, as well as
to assist in the day-to-day manage-
ment of the company. In addition to
providing an independent financial
picture of your borrower, turnaround
consultants might help arrange equity
investments or find an acquirer of the
company or its debt.
Recall the letter of intent referenced
at the beginning of this article. Unfor-
tunately, the company that submitted
the letter of intent was unable to eval-
uate the borrower’s financial position
because the financials were not well
maintained and the borrower’s man-
agement had lost its focus. The combi-
nation of disorganized financials and a
distracted management team resulted
in significant time delays and a
reduced purchase offer. A turnaround
consultant could have streamlined this
process considerably.
In some cases, the borrower pays
the cost of a turnaround consultant;
however, given the delta between the
liquidation value of a company and
its market value as a going concern,
banks should consider advancing the
consultant’s fees as a protective mea-
sure and to minimize further losses.
Forbearances and Modifications
Forbearances and modifications
are important tools to consider for
any workout strategy. However, for-
bearance agreements often are used
Jason E. Kuwayama
