Transcript Managing Troubled Assets-Portfolio Management Series Webinar
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Managing Troubled Assets
Portfolio Management Series Webinar
Introductions
Ray Waters – President, Enterprise Detroit You, the participants – Small and Large CDFIs – – Credit Unions and Banks Consultants CDFI Fund Capacity Building Initiative Managing Troubled Assets
Overarching Themes
Jump on problems early – Much easier to bring a loan that is 15 days past due to current than to rescue a loan 120 days past due Diagnose the situation – Why is the borrower not paying? – What is really going on?
Protect collateral, security interests – What is your recourse if the borrower and loan fail?
CDFI Fund Capacity Building Initiative Managing Troubled Assets
The Risk Grading System
Enterprise Detroit uses a risk grading system that goes from 1 (best) to 8 (worst) All loans are assigned a grade at closing – Starting grades are usually a “4” or a “5” Risk grades are adjusted upwards or downwards as necessary By “Troubled Assets” we primarily mean – Loans on the Watch List (risk grade “6” in this presentation) – Loans on the Problem Asset List (risk grade “7” in this presentation) CDFI Fund Capacity Building Initiative Managing Troubled Assets
Progression from Past Due to Charge-Off
Past Due List, Delinquency Watch List – Borrowers late on payment, haven’t submitted financials or other required information – Risk rating downgrade from 5 to 6 Problem Asset List – Borrowers with significant deterioration in financial condition – Risk rating downgrade from 6 to 7 Non-Accrual Status – – Subset of the problem asset list All payment goes to principal reduction – Last resort before write-off CDFI Fund Capacity Building Initiative Managing Troubled Assets
Watch List (“6”) Description
Risk Factor
Cash Flow Balance Sheet
Status
Borrower makes payments but calculated cash flow might not cover principal. Improvement in cash flow is uncertain. Borrower struggles to keep taxes current.
High debt/worth ratio (>5:1). Perhaps negative working capital. May be slow in paying accounts payable. Management is inadequate, lacks depth, serious organizational shortcomings. FICO >/= 640 Management Capacity Collateral Industry/Market CCR less than 0.75 LTV greater than 1.2
Business has tough competition, relies on commodity pricing, or been negatively impacted by economic trends. Tough to make a profit.
Ability to Produce Financials Business produces reliable financial statements at least twice/year.
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Problem Loan (“7”) Description
Risk Factor
Cash Flow Balance Sheet Management Capacity Collateral Industry/Market Ability to Produce Financials
Status
Cash flow does not cover interest payments. Borrower struggles to keep loan current. Taxes are past due.
Negative or no net worth. Negative working capital. Very slow in paying accounts payable. Management struggling to demonstrate s/he has a viable business model. FICO <640 Loan is for all practical purposes, unsecured.
Significant deterioration in market has manifested itself in severe weakness in the borrower.
Business has not produced reliable financials at least twice per year. CDFI Fund Capacity Building Initiative Managing Troubled Assets
Watch List
Typically flagged by loan officer: late on payment, hasn’t submitted financials or other required information Loan officer can recommend downgrade of loan from 5 to a 6 Watch list candidate can also be identified from Portfolio Quality Report At weekly staff meeting, talk about every problem loan and what to do for each of them First step is lender visit -- get assessment of situation CDFI Fund Capacity Building Initiative Managing Troubled Assets
Problem Loan List
Significant deterioration in financial heath of borrower.
Run UCC checks, new credit check, check if any new liens have been filed.
Try to determine what is the real situation.
Often means re-structure; forbearance agreements.
With 7s and some 6s, it’s an exercise in bird-dogging. Force them to meet with us. Goal is not to write a company off. Better to restructure to fit the situation than to write off and go after the collateral. CDFI Fund Capacity Building Initiative Managing Troubled Assets
Loan scrutiny should be dictated by the loan policy and driven by the risk grade.
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Loan scrutiny should be dictated by the loan policy and driven by the risk grade.
< $50m
Credit Grade
Loan Size F/S Requirements Lender Review Risk Manager Review 4
Borrower submits semi annual or quarterly financials Review Annually- Notes on F/S Annual Risk Rating Review
5
Copy of Income Taxes, business and personal, within 180 days of FYE Lender reviews tax returns, Notes on returns Rating based solely upon receipt of tax returns and payment history
6
Copy of Income Taxes, business and personal, within 180 days of FYE Monthly update in PQR and Special Assets Committee
7
Copy of Income Taxes, business and personal, within 180 days of FYE Monthly update in PQR and Special Assets Committee Monthly update in PQR and Special Assets Committee Monthly update in PQR and Special Assets Committee
Additional Site Visits Customer Contact Other
none required Annually none required Semi-annually Upgrade, Work Out or Payoff Plan As Directed by Special Assets Committee Based upon Upgrade, Work Out or Payoff plan Upon downgrade pull new Credit Report, lien search, double check closing documents Work Out, Payoff or Liquidation plan As Directed by Special Assets Committee Based upon Work Out, Payoff or Liquidation plan CDFI Fund Capacity Building Initiative Managing Troubled Assets
An action plan should be devised for each past due, watch list and problem loan.
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Credit Status & Action Items Report
Company Name, Credit Status and Action Items Action Items Borrower: Underlying Problem: Strategy/ Action Items: When will loan be moved out or upgraded?
Status Report: Past Due List
Loan #1 Loan #2
Watch List
Loan #3
Date Action Items: Preparer Responsible Parties: Due Date:
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Working with Difficult Borrowers
Common reasons why borrowers don’t pay: – – – Cash flow problems More pressure from other creditors Thinking you are their “partner” – not being tough enough How to determine the truth: – – Dig through their financials Be hands-on – “We trusted you to give you a loan; you have to be honest with us” – Check credit scores; tax returns; personal financial statements CDFI Fund Capacity Building Initiative Managing Troubled Assets
Working with Difficult Borrowers (cont’d)
Negotiation tactics Default interest rate Obtain more collateral Forbearance agreement Restructuring – If the borrower agrees to certain conditions Monitoring, review and update protocols Documentation – Items to include in the loan file CDFI Fund Capacity Building Initiative Managing Troubled Assets
Collateral
Write-ups must show the collateral you have Calculate your risk exposure – For example, in declining housing market, re-assess value of collateral – Risk & Compliance Manager role Protect your collateral interests; maintain collateral files – – Must have mortgages, liens, collateral in line Tickler system to make sure everything is current Appropriate Staffing – One person should be responsible for maintaining all UCCs, liens, mortgages, discharging mortgages, etc.
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Work-Out Strategies
Restructuring loans – – – When to do restructure; when not to restructure Calculating ability to pay Determining appropriate terms Use of forbearance agreements Essential to have accurate valuation of collateral Check personal guarantors CDFI Fund Capacity Building Initiative Managing Troubled Assets
Worst-Case Scenarios
Foreclosure processes Putting it out to collection Collateral Personal judgments Legal issues Public relations/bad press What to do with REO CDFI Fund Capacity Building Initiative Managing Troubled Assets
Wrap-Up
This presentation is part of a series of four webinars, including: CDFI Loan Policies and Procedures Raising Debt and Equity from External Sources Risk-Assessing Your Own Organization Managing Troubled Assets To participate in upcoming webinars, register at: http://www.carseyinstitute.unh.edu/CDFI-webinars.html
For more information about the CDFI Fund’s Capacity Building Initiative, please visit: http://www.cdfifund.gov
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Wrap-Up
Sample documents, etc. will be available as part of a Resource Bank on the CDFI Fund’s Capacity Building Initiative webpage later this summer. Please see Capacity Building Initiative.
http://www.cdfifund.gov/cbi to view the Resource Bank and other helpful information on the As part of the CDFI Fund’s Capacity Building Initiative, free Technical Assistance (TA) and Organizational Assessments are available to certified and emerging CDFIs. To sign up, e-mail: Jack Northrup at [email protected]
or Eric Hangen If you have not taken the survey, please do so at the following link: http://www.unh.edu/survey-center/cdfi.html
CDFI Fund Capacity Building Initiative Managing Troubled Assets
Managing Troubled Assets Thanks for being with us today!
CDFI Fund Capacity Building Initiative Managing Troubled Assets