Effective Strategies in Loan Restructuring
Having understood and appreciated the bank’s internal restructuring procedures mean that the borrower has the upper hand when conducting negotiation with the bank. This, of course, assumes that the bank is willing to proceed to loan restructuring as opposed to commencing legal actions to wind up the company.
Naturally, all borrowers would always aim for a successful restructuring. In general, the restructuring process can be considered successful (from borrower’s point of view) if:
a. The restructuring is completed speedily
b. The loan can be rescheduled for the longest possible time
c. Minimum resources (time and fees) were spent on the restructuring
d. The agreed terms and conditions are to the borrower’s advantage
e. In the event of settlement, maximum hair cut / waiver is obtained.
Public listed companies will have more choices as to the techniques used for restructuring (e.g. debt equity conversion, issuance of new shares, rights issues, issuance of other security papers etc).
For private limited companies, the choices are extremely limited. If not handled with care, chances are high that bank will commence legal actions to wind up the company, even though it is still a viable operation (at least from the borrower’s point of view).
The Practical Approach in Restructuring Defaulted Loan
Now let us be practical. To resolve bad loan, companies need to have cash and the cash has to come from somewhere.
Notwithstanding the various restructuring techniques (e.g. issue shares, rights issue, issuance of security papers etc), the fact remained – there is a need to raise sufficient cash to settle the bad loan or face legal actions from the banks. If the cash is not forthcoming, for whatsoever reasons, the bad loan problem remained unresolved and winding up is the only eventuality.
Hence, borrower may want to consider the following actions to either resolve the problem or at least delay the problem until business turns around:
Banks are generally agreeable to extend the tenure of repayment. With the extension, the monthly repayment will be more affordable or in line with the company’s reduced cash flow. To successfully obtain the consent from banks to reschedule, there is a need to prepare a Restructuring Proposal (detailing the pertinent information about the company) in order to support the rescheduling.
b. Pay interest only
As a general rule of thumb, as long as interest is up to date, banks are rather unlikely to take drastic action such as commencing legal actions. In fact, even if cash flow permit to pay certain amount of installment, it is always advisable to conserve the cash for certain “down” months. This will ensure that interest servicing is prompt regardless of business uncertainty.
c. Request for waiver on overdue / penalty interest and/or hair cuts
Company that intends to fully settle the bad loan with cash may request for certain waivers such as overdue interest and also some hair cuts.
d. Apply for rehabilitation fund
Eligible borrowers can apply for the Rehabilitation Fund, which is made available by Bank Negara. With the additional fund, it can be used for working capital to generate more cash flow from operations (which can be used to pay down the existing bad loan). All commercial banks participate in this rehabilitation fund.
e.Delay legal actions
If the banks are commencing legal actions, the borrower may want to seriously consider delaying the legal actions. However, there are always drawbacks in challenging the banks in the court.
f. Consult with Bank Negara (Central Bank)
If the borrower feels that it has been unfairly treated or its reasonable proposal has been turned down repeatedly, then the borrower may want to seriously consider referring the matter to Bank Negara.
g. Last resort
If all the above actions failed, the borrower must prepare itself for winding up (and personal bankruptcy) by maximizing its net wealth through proper assets management.
It should be emphasized that, throughout the loan restructuring process, it is extremely important for the borrower to be diplomatic, patient and maintain regular contact with the bank’s representative at all times.
At the end of the day, relationship banking still plays a vital role in the success of the whole restructuring process.
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