Managing Troubled Assets Portfolio Management Series Webinar

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Managing Troubled AssetsPortfolio Management
Series Webinar
Developed and delivered by
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Introductions

• Ray Waters
• President, Enterprise Detroit
• You, the participants
• Small and Large CDFIs
• Credit Unions and Banks
• Consultants

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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
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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)

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Progression from Past Due to Charge-Off

• Past Due List, Delinquency
• Watch List
• Borrowers late on payment, havent 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

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Watch List (6) Description
Risk Factor Status
Cash Flow Borrower makes payments but calculated cash flow might not cover principal. Improvement in cash flow is uncertain. Borrower struggles to keep taxes current.
Balance Sheet High debt/worth ratio (gt51). Perhaps negative working capital. May be slow in paying accounts payable.
Management Capacity Management is inadequate, lacks depth, serious organizational shortcomings. FICO gt/ 640
Collateral CCR less than 0.75 LTV greater than 1.2
Industry/Market 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.
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Problem Loan (7) Description
Risk Factor Status
Cash Flow Cash flow does not cover interest payments. Borrower struggles to keep loan current. Taxes are past due.
Balance Sheet Negative or no net worth. Negative working capital. Very slow in paying accounts payable.
Management Capacity Management struggling to demonstrate s/he has a viable business model. FICO lt640
Collateral Loan is for all practical purposes, unsecured.
Industry/Market Significant deterioration in market has manifested itself in severe weakness in the borrower.
Ability to Produce Financials Business has not produced reliable financials at least twice per year.
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Managing Troubled Assets
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Watch List

• Typically flagged by loan officer late on
  payment, hasnt 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
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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, its 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.

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Managing Troubled Assets
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Loan scrutiny should be dictated by the loan
policy and driven by the risk grade.
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Loan scrutiny should be dictated by the loan
policy and driven by the risk grade.
Loan Size Credit Grade Credit Grade Credit Grade Credit Grade
Loan Size 4 5 6 7
lt 50m F/S Requirements Borrower submits semi annual or quarterly financials Copy of Income Taxes, business and personal, within 180 days of FYE Copy of Income Taxes, business and personal, within 180 days of FYE Copy of Income Taxes, business and personal, within 180 days of FYE
lt 50m Lender Review Review Annually- Notes on F/S Lender reviews tax returns, Notes on returns Monthly update in PQR and Special Assets Committee Monthly update in PQR and Special Assets Committee
lt 50m Risk Manager Review Annual Risk Rating Review Rating based solely upon receipt of tax returns and payment history Monthly update in PQR and Special Assets Committee Monthly update in PQR and Special Assets Committee
lt 50m Additional     Upgrade, Work Out or Payoff Plan Work Out, Payoff or Liquidation plan
lt 50m Site Visits none required none required As Directed by Special Assets Committee As Directed by Special Assets Committee
lt 50m Customer Contact Annually Semi-annually Based upon Upgrade, Work Out or Payoff plan Based upon Work Out, Payoff or Liquidation plan
lt 50m Other     Upon downgrade pull new Credit Report, lien search, double check closing documents  
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Managing Troubled Assets
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An action plan should be devised for each past
due, watch list and problem loan.
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Credit Status Action Items Report
Company Name, Credit Status and Action Items Company Name, Credit Status and Action Items Company Name, Credit Status and Action Items Action Items Action Items Date Preparer
Borrower Underlying Problem Strategy/ Action Items When will loan be moved out or upgraded? Status Report Action Items Responsible Parties Due Date
Past Due List
  Loan 1              
  Loan 2              
 Watch List              
Loan 3
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Managing Troubled Assets
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Working with Difficult Borrowers

• Common reasons why borrowers dont 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

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Working with Difficult Borrowers (contd)

• 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

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Managing Troubled Assets
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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
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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

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Worst-Case Scenarios

• Foreclosure processes
• Putting it out to collection
• Collateral
• Personal judgments
• Legal issues
• Public relations/bad press
• What to do with REO

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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.h
  tml
• For more information about the CDFI Funds
  Capacity Building Initiative, please visit
• http//www.cdfifund.gov

CDFI Fund Capacity Building Initiative


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Wrap-Up

• Sample documents, etc. will be available as part
  of a Resource Bank on the CDFI Funds Capacity
  Building Initiative webpage later this summer.
  Please see http//www.cdfifund.gov/cbi to view
  the Resource Bank and other helpful information
  on the Capacity Building Initiative.
• As part of the CDFI Funds 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 jack_at_nemarketresearch.com or
  Eric Hangen at ehangen_at_i2community.org
• If you have not taken the survey, please do so at
  the following link http//www.unh.edu/survey-cent
  er/cdfi.html

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Managing Troubled Assets

• Thanks for being with us today!