How to restructure defaulted banking facilities (part 2)

How do Banks Decide on Loan Restructuring
The decision of whether to restructure or not may not be a simple one.  There is a need for the bank to analyze the viability of the borrower, which is the first step in loan restructuring.

Viability is the capacity to function profitably, which is affected by both economic and non-economic factors.  Unless the borrower has viability, it should not continue, although carrying on in the short term to complete work in progress or to search for a buyer (capable of making it viable) may be a preferred alternative to immediate close down or fire sale.

There is no hard and fast rule to determine or assess viability.  As such, it is the judgement and foresight of the banks that count.  However, as a general guide, bank will undertake to answer the following questions when assessing the viability of the borrower:

1. What causes the company to be in financial difficulties (bad economic conditions, mismanagement, excessive speculation, over-gearing etc)?
2. Are the factors temporary (such as caused by currency devaluation, significant increase in interest rates, price changes etc) or permanent (such as change in technology, excessive investments, mismanagement etc)?
3. If temporary, then chances of recovery are higher.  If, however, it is caused by permanent factors then the viability of the borrower is doubtful.
4. Is the business viable and worth saving (taking into consideration its management track record, business connection)?
5. Can the business run profitably and repay the loan, after restructuring?
6. What is the value of the assets on a going concern and forced sale basis?
7. Any possibility of further equity / asset injection or white knight to the rescue?
8. How supportive / hostile are the company’s other banks and trade creditors?
9. Is the proposed arrangement to settle the facility reasonable and acceptable?
   

The answers to these questions will assist in the assessment of the viability of the borrower.  In practice, however, most banks usually give the borrower the benefit of the doubt that it is still viable and move towards compromising to restructure the banking facility.  

Read Part 3 here.