Commercial Loan Workout

A loan workout is a new agreement between the borrower and lender that changes the loan.

Many times the borrower in distress needs additional funds because of problems arising from its business and benefit from a loan restructuring.

Some of the most common modified loan terms include:

• Payment Amount. The Parties Can Agree To Temporarily Decrease Or Pause The Amount Due In Return For An Increase In The Payment Later In The Life Of The Loan.
• Payment Dates. The Parties May Also Agree To Temporarily Pause Payment Dates In Return For An Increase In Later Payments Or An Extension Of The Payback Period.
• Maturity Date. The Date When Full Payment Is Due May Be Pushed Back To A Later Time.
• Interest Rate Changes. The Amount Of Interest Charged On The Loan May Be Reduced.
• Sale Of Property. A Loan Workout Might Call For The Sale Or Liquidation Of A Property In Lieu Of Foreclosure.

How Do You Get A Loan Workout?

A loan work out is not something you want to get – it means that the borrower or the lender have screwed up because a loan has gone from “safe” to “risky” on the bank’s measures of risk.  The measures for Non-performing Assets (NPA) can be numbers, letters, or words.  Here are some commonly used risk measures:

• 1 – Undoubted Risks – Think Cash Money
• 2 – Low Risk – Think Real Estate With Equity
• 3 – Moderate Risk – Equipment That Is Quickly Depreciating And Business Dropping Off
• 4 – Cautionary Risk – The Equity In The Equipment And Real Estate Is Dwindling.
• 5 – Unsatisfactory – The Assets Are Underwater And The Operator Is Missing Payments
• 6 – Unacceptable – Risk Of Loss – The Loan Is Placed On Nonaccrual And Lawyers Are Called.

The above list is a general guide – the FDIC and OCC provide guidance for financial institutions on their risk profiles, but each bank has their own special way of assigning risk.

Loans that are unacceptable often become workouts, then down the line they can become lawsuits.  Sometimes those loans are sold to distressed asset companies that buy the debt below its book value (the value of the collateral) and liquidate the loan for profit.

A loan workout is almost a new agreement between a lender and a debtor.  The loan basically remains the same, but the interest rate or maturity date of the loan are modified.

The debtor’s attorney would ensure that the workout would solve the problems that the borrower is facing, or at least put them in a position to make the loan work – which sometimes does not happen and the loan goes into collection (litigation).

A borrower should contact an attorney as soon as possible in order to assist in the loan workout process and to help resolve any financial issues that the business may be facing before the problem gets worse.

Contact a Loan Workout Attorney ASAP when problems arise.

A workout plan would then be proposed once the debtor’s attorney has reviewed the borrower’s financial condition based on the information provided by the borrower.

Any negotiation process requires the expertise of an attorney who has experience in loan modification because commercial loans are often very complex.

When restructuring a loan, there are some legal issues that need to be avoided.

If a business is ultimately forced into bankruptcy, the loan modification must avoid any so-called preference problems—a situation in which a creditor receives favorable treatment at the expense of other creditors.

Counsel for the bank needs to address preferences in its workout agreements with appropriate dates.

A loan modification agreement may also involve additional filings pursuant to the Uniform Commercial Code, or mortgage modifications.

Our Distressed Assets Attorneys Can Help

When a commercial loan goes into a workout, it means that the borrower and lender have both screwed up. The loan has gone from being safe to risky on the bank’s measures of risk. This can happen for a number of reasons, but most commonly it’s because the borrower is not making their payments on time.

The loan workout process is something that you definitely want to avoid if possible. It’s a long and difficult process that can result in the loss of your business. However, if you find yourself in this situation, there are a few things that you can do to improve your chances of success.

The first thing you need to do is contact your lender and let them know that you’re having trouble making your payments. They may be willing to work with you to modify your loan agreement. This could involve lengthening the repayment period or reducing the amount of your monthly payments.

If your lender isn’t willing to work with you, there are still other options available. You could try to find a new lender who is willing to give you a loan modification. Or, if you have assets that are worth more than your loan balance, you could try to sell them and use the money to pay off your loan.

Whatever you do, don’t wait until it’s too late to act. The sooner you start working on a loan workout, the better your chances of success will be.

Call our lawyers with your commercial loan portfolio that has fallen into default and become an unacceptable risk of loss – it’s the safe and sound banking thing to do.