March/April 2014
Wisconsin Community Banker
29
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in place of a well-developed plan for
the resolution or rehabilitation of a
credit. The purpose of a forbearance
agreement should be to provide both
parties with time to achieve a realistic
result—whether it’s a payoff, substan-
tial paydown, equity investment, refi-
nance, or sale of the loan.
But entering into multiple forbear-
ances without a clear plan can nega-
tively impact your overall recovery by
creating borrower defenses or simply
wasting time while the collateral value
(and market interest) deteriorates.
If a borrower presents a reasonably
viable resolution plan to you (or the
bank develops a strategy), then a for-
bearance agreement can be effective
in maintaining that credit in the short
term. However, without an identified
end goal, a forbearance agreement
becomes a distracting and costly waste
of time for the bank and borrower.
Third-Party Asset Management
Perhaps the most overlooked cost
is the cost of human capital. Many
banks rely on their lenders to work
out or manage troubled credits. But,
using lenders for workouts weakens
the bank’s relative bargaining position
because a borrower can utilize the
existing relationship against the lender
during negotiations. It also requires
that lenders focus on the recovery of
“bad dollars” rather than find new,
healthy relationships and loans.
An interesting—perhaps ideal—
option is to hire an outside company
to manage troubled portfolios. These
companies specialize in three key
areas: portfolio review and strat-
egy, market value analysis, and net
recovery.
The best companies deliver national
experience along with a local sensitiv-
ity to your reputation and community
politics. Some of these companies
already manage a significant number
of assets in Wisconsin.
By outsourcing the management of
your distressed portfolio, your bank
frees up lenders and resources while
leaving the negotiations and manage-
ment to a specialist that maximizes
your recovery. If your bank employs
workout specialists, they can focus on
the most sensitive credits while the
management company focuses on the
remainder of the portfolio. Pricing for
asset management varies, but ranges
from a fixed percentage to a factor of
net recovery.
What’s Your Plan?
The 2008 financial crisis illustrated
the danger of developing a reactive
plan on an asset-by-asset basis follow-
ing a declaration of default. The details
of a successful asset management plan
vary for each bank and depend on the
loans, collateral, customer relation-
ships, and capital position. Our port-
folio advisory group can assist you
with developing an asset management
plan by drawing on our experience
and by leveraging our relationships
with national leaders in asset manage-
ment and rehabilitation.
Jason E. Kuwayama is a member
of Godfrey & Kahn’s Banking and
Financial Institutions team. He leads
the Portfolio Advisory Practice Group
and can be reached at jkuwayama@
gklaw.com or 414-287-9278.
