How to restructure defaulted banking facilities (part 1)

Introduction 
Managing a business is full of uncertainty.  At times, things may not go according to plan and this will cause numerous problems and challenges to the management.  This includes enormous pressure on profitability, growth and restricted opportunities to do business.   If the problems persist, it will also cause the company to struggle in servicing its bank loans and eventual collapse of the company.

Under a potential default situation, it is critical for the management to understand and be aware of the basic framework of restructuring banking credit facilities.  The potential default situation has necessitated the management to be alert and have access to comprehensive information regarding all aspects of loan restructuring.    

With this in mind, this article is primarily aimed at assisting and supporting borrowers in restructuring banking credit facilities.  It will introduce some effective strategies in restructuring credit facilities.   It will also illustrate the framework of loan restructuring that includes the bank’s internal restructuring procedures, how to prepare loan restructuring proposal and the features of rehabilitation fund. 

Insights of Bank’s Internal Restructuring Procedures
In general, banks prefer to restructure bad loans as it offers better recovery rates when the bad loan becomes a performing loan again.  In other words, borrower with a “viable” bad loan is usually given the opportunity to restructure the loan in accordance to the bank’s internal restructuring guidelines and procedures.

Different banks may have different attitude towards restructuring bad loan, ranging from highly aggressive and super efficient to greatly generous and pathetically slow.  Obviously, to the borrower, the later type of attitude is preferred.   This, unfortunately, is no longer a choice to the borrower when the loan has already turned bad.

Whilst different banks have different attitude, their loan restructuring procedures are rather similar.   Upon default in payment, the remedial actions that will be taken by the bank include demanding for the following (usually in the following order):

a.         Recall the facility immediately
b.         Reduce the loan amount gradually (by requesting for accelerated repayment)
c.         Request for collateral/additional collateral and/or guarantee (including debenture)
d.         Increase the interest rate (in addition to the penalty interest)
e.         Impose additional covenants to “tighten” the terms and conditions

If the borrower is able to meet the bank’s demand, then the loan will proceed as normal.  However, if the borrower is unable to meet any of the above demand made by the bank, then the bank is left with the following choices:

a.         Restructure the loan (i.e. sit down and negotiate)
b.         Commence legal action to recover the loan (i.e. refuse to negotiate)

Read Part 2 here.