Loan Portfolio Review: 10 Things You Can Do To Head Off Trouble

This is the first in a series of brief articles that Moye White will be sending to its clients and friends to provide practical advice about the opportunities and challenges presented by today's economy.

1. Review Your Collateral Position. Update lien searches on your customers if you have not run them in the past 12 months. Make sure there are no tax liens, judgment liens or additional creditors who have taken a lien on your customers’ assets in violation of any loan covenants.
2. Research Account Debtors. If you are lending against accounts receivable, do some online research on your customer’s top account debtors to see how their businesses are faring. Bad news for them may mean slower collections or cancelled contracts for your customers. It may be time to adjust advance rates for certain account debtors or even to make a good faith judgment call that accounts from certain account debtors are “doubtful.”
3. Obtain Updated Guarantor Financials. If you are relying on guarantees from high net worth individuals, trusts or other affiliates of a borrower, now may be a good time to request updated financial information, even if it’s not “due” until year end. Most loan documents contain (or should contain) clauses that allow you to make reasonable requests for information outside of normal reporting periods.
4. Review Your Loan Documents. Now is the time to make sure all of your outstanding loans have been properly documented, including forbearances and waivers. If a loan looks particularly troubled, it is probably worthwhile to have outside legal counsel to do a legal audit of the loan file (usually a 1-2 hour endeavor depending on the size of the file).
5. Visit Customers. You can get a good feel for how customers are doing by scheduling a “catch up” meeting at their offices. Ask questions about how they plan to ride out the economic challenges currently in the market and what changes, if any, they are making to workforce, business plan, etc.
6. Recommend Good Advisors. If you see a customer is losing ground and you are concerned that the current management team is not able to handle a downturn, don’t be afraid to recommend that they engage a turnaround management advisor or other advisors (if you do recommend specific companies, recommend 2-3, so that you don’t have any lender liability issues that arise as a result).
7. Use a Default to Restructure. If a borrower breaches a financial or other covenant, don’t forbear or waive without looking at things you may want to do to add additional protections to your loan. If you currently don’t have a lien on all assets of the borrower, think about whether requiring additional collateral will strengthen your chance of recovering the full loan amount in a liquidation scenario. If the financial covenants you have in place are not a true measure of a borrower’s performance, think about what you might want to add (or replace) to better gauge where that borrower is going.
8. Review Condition of Collateral/Asset Quality. If your collateral is real estate, make a site visit, make sure you don’t need any updated environmental reviews, and check vacancy rates, rental rates, etc. for commercial property. Take the time to review asset and income quality on financial statements (and make sure you are receiving timely financial reporting). Assess items such as the aging of Accounts Receivable (increasing receivables can indicate market deterioration) and Accounts Payable (slower payments may hide cash flow issues), inventory levels (increasing inventory may mask a decline in sales) and falling margins (more discounts to generate revenue). This may help you identify potential future defaults or difficulty, even if the loan contains few, if any, financial covenants.
9. Follow the Industry. Review your customer’s industry and its known competitors. If the industry or competitors are suffering, your customer is facing the same pressure. Significant acquisition activity in the industry should be reviewed to determine if your customer is a potential acquisition target.
10. Review Customer’s Legal Expenses. Significant increases in legal expenses by a customer may indicate increased collection activity, especially in the construction-related industries where counsel will be retained to file and commence lien actions. Again, this may indicate a deterioration of business and asset quality.

For more information contact: Trish Rogers at (303)292-7939

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