2 June 2015
Watch out for any warning signs
Firstly, a lender needs to spot the early warning signs.
These signs include the borrower breaching or being about to breach its financial overdraft limits, or suddenly requesting new facilities or an extended repayment timetable. The borrower may be under increased creditor pressure or subject to litigation, insurance claims or rent reviews.
Other warning signs include the borrower:
Other signs might be a spurious or unmeritorious complaint about an interest rate product of the lender that could be an attempt to draw attention away from more fundamental problems.
Secondly, lenders need to be aware that information is key.
Communicate with other lenders
Thirdly, lenders need to communicate to other lenders and investors. However, Lenders need to beware of any confidentiality restrictions and privacy obligations first.
It would be recommended for lenders that, after having identified relevant stakeholders, they be prepared to implement standstill or other forbearance agreements to stop unilateral action which might frustrate an overall strategy for a defaulting borrower.
Lenders should also consider deciding whether to support a defaulting borrower or rather minimise their exposure through enforcement mechanisms. A decision will need to be made whether the lender wishes to sell the debt to another financier.
If a lender is to support the borrower, the strategy might involve the following:
On the other hand, an enforcement strategy might include:
Lenders should also consider whether a form of restructuring for a defaulting borrower might be useful.
A financial restructuring could include writing off debt, swapping debt for equity or restructuring loans. Operational changes could also include giving the defaulting borrower time to negotiate a management buy-out or facilitate a change in management acceptable to the lender. This might give time to enable the borrower to change business direction. The borrower may also look to inflate distributable profits or balance sheet insolvency by issuing new share or reclassifying existing share capital.
A further issue is the need to consider cross-default issues and to assess the advantages and disadvantages of various enforcement mechanisms. The lender will also need to assess whether any enforcement action will give rise to priority of payment issues.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
For any further information concerning this article, please contact JHK Legal.
Author: Michael Tourkakes LLM., LL.B., Grad.Dip.(Leg Prac), Adv.Dip.Bus.(Leg Prac)
Published: June 2015