Thomas Paine once wrote, “These are the times that try men’s souls.” He could have been referring to workout officers after the cyclical economic downturn flattened out, and before the wave of restructurings, liquidations and bankruptcies subsided, and the economy stabilized.
Many important lessons were learned during the Great Recession, and when combined with lessons learned in previous down cycles, workout officers hold a wealth of valuable information not only for internal constituents, but portfolio borrowers as well. The relationships developed during these difficult times with attorneys, accountants, appraisers and consultants can provide added value to financial institutions. The workout officer should leverage this knowledge and these relationships to remain relevant and visible.
Work with Your Borrower
With more time to devote to fewer borrowers the workout lender can spend more time with management discussing strategy, core competencies, opportunities for operational improvements and competitive dynamics. Here are some practical suggestions:
1. Combine quarterly site visits with periodic phone calls to be a sounding board for management and an opportunity to guide management toward strategies that improve the company’s competitive position and the credit profile of your loan. Get out from behind your desk and meet with your borrower at their place of business. Visit as many locations as possible (warehouses, satellite offices, etc.). It’s the best way to learn the business and operations.
2. Don’t be shy about offering your observations relating to what you have seen other companies successfully implement, or simply asking provocative questions. Management will very often be very receptive to what you have to say. Remember that the management teams of your borrowers see the world through one set of eyes: their company. The workout officer sees the world through an entire portfolio that periodically adds new companies and industries.
3. Getting more involved with your borrowers’ operations will help you develop deep relationships built on respect and trust. If your borrower can improve its credit profile and become a bankable asset, the relationship you develop can help you fend off refinancing risk as their credit profile improves. Make management’s refinancing decision difficult by making the decision about your valued-add relationship not the new lenders lower pricing. Differentiate yourself; don’t be a commodity.
Restructure Debt and Keep Good Borrowers
This is a good time to look creatively at your remaining problem loans. You may have the flexibility to work with your borrower while they turn around their operations rather than forcing a sale or a refinancing of your debt. If your borrower has a reason for being, and the management team has strong character and integrity, perhaps you should look at tying them into a long-term borrowing relationship.
Can you restructure the loans in such a way to improve the risk profile and provide your borrower with long-term financing certainty? You have lived through tough times, why not stay in the relationship and benefit from the borrower’s upturn?
To a certain extent, the health of your institution’s balance sheet will influence how much patience you have in working with your borrower to turn the corner. Work with your borrower and your senior management. Set benchmarks and timetables that result in steady improvements in the credit profile of your borrower. Focus on reducing specific reserves and then upgrading risk ratings.
Your institution made a significant investment in acquiring your borrower, servicing the loan and carrying higher loan loss reserves. Before you push the borrower to refinance you, consider a continuing financing relationship. If you structure an acceptable risk return profile, the devil you know may be better than the devil you don’t.
Now that the problem loan volume has greatly diminished and you have time to focus on other things, consider developing training programs for your institution’s portfolio management group, due diligence group and the operations area. Now is the time to leverage your network of consultants, attorneys and appraisers, and involve them in your in-house training program.
This network will have a wealth of information on not only turnarounds, but also on profit improvement, strategy development, due diligence insight, and collateral and enterprise valuation methodologies. Your contacts will be very interested in speaking to your portfolio management and support teams. It’s an opportunity for them to show their skills and meet future clients. Get involved in the training. You have a wealth of knowledge that less experienced loan officers can benefit from.
Your audience will find case studies and post mortems of your successes and failures interesting and instructive. Package unsuccessful cases so you don’t appear to be indicting prior loan officers’ handling of the loans.
Shadow the Performing Portfolio
A lending organization always benefits from having an experienced workout professional in the earliest stages of borrower operational problems. Early recognition and aggressive hands-on management of the loan are the keys to keeping a performing loan from deteriorating to a criticized loan. Developing a relationship with the loan officers is essential. It’s human nature for the loan officer to think, “Why should I consult with them? What do they know that I don’t?” or to worry they will lose control over managing the loan. By nature, workout professionals have aggressive, take-charge personalities. If you rein in the desire to take charge and assume a mentoring and advisory role, you will build trust with the loan officers.
Offer to provide input on setting field examination audit scopes and developing ancillary analysis to provide greater insight into the company’s operations. Ask the loan officer if he or she would like you serve as another set of eyes and ears for the company.
Invest In Yourself
Now that you have time to pull yourself out of the weeds, use that time to find ways to invest in your skill set. Whether you are improving spreadsheet skills, writing articles, taking executive education courses or reconnecting with your network, be sure to sharpen your skills and market intelligence. Keep current with industry publications, as well as the Wall Street Journal, Businessweek and the Harvard Business Review. Touch base with your contacts and find out what they see going on, not only in the lending market, but the business market in general so you can anticipate where the next hot spots may be. Talk with your organization about attending executive education programs that have relevance to problem asset management. It is a sizeable investment for an organization, but it’s a conversation worth having.
Ask to spend time in functional groups that support you in your role as loan officer, such as the field examination and due diligence area and the operations area. If you can work on a few field exams and perform the billing, posting and collection activities you will have a better understanding of what goes into supporting each loan officer.
Share Your Network
Introduce the CEOs and CFOs of your borrowers to attorneys, financial advisors or CPAs you think they would enjoy meeting. Also introduce them to senior management teams of other customers in your portfolio. These introductions may turn out to be mutually beneficial because of the serendipitous nature of such encounters. And you will have shown your network partners that you are thinking about them.
Use this time to build your network. Get in touch with professionals you respect but haven’t had a chance to engage for an assignment. Learn their approach to handling problem loans. Share war stories. It’s an excellent way to evaluate someone’s skill set and experience level.
Now that you have more time available, be sure not to waste it. Keep working on your professional development. Remain relevant and visible. Thomas Jefferson said, “Determine never to be idle.” I’m sure he didn’t have economic cycles in mind, but it’s good advice.
Walter Schuppe is SVP, managing director in the Special Assets Group, CapitalSource.