Demystifying distressed credit
Lenders dealing with distressed creditors face a complex task managing and restructuring their
loan books. But even with cross-border lending, banks can – with the right advisors – take the
complexity out of crisis management, as Grant Thornton’s Mark Byers explains to Jim Banks.
The economic downturn and financial
markets crisis present banks with many
challenges, not least when credits
become distressed. But help is at hand from
restructuring advisors who can guide banks
and their borrowers through the complexity of
crisis management.
Mark Byers, partner at global audit, tax and
advisory organisation Grant Thornton, believes
the first step is the assessment of corporate
borrowers at the pre-loan stage.
‘Banks should look at whether corporates
can maintain competitive advantage in the face
of lower cost competition, and whether they
should exploit overseas markets to diversify
risk away from domestic markets. Credit
committees should check that the corporate
has adequate forecasting to monitor loan
covenant stress and the vision to develop
effective contingency plans. Does it have good
treasury and working capital management
processes?’ he says.
‘Other key issues are whether corporate
borrowers can manage business risk in a
downturn and maintain vigilance against fraud.
Pressure to reduce costs may defer important
internal risk programmes. Our forensic teams
are addressing corporate governance and
procurement breaches and we are currently
working with the authorities at the UK end of
the Madoff fraud. Even if management have
the right data for decision making on time, they
may not have experienced a downturn before,
which involves careful external stakeholder
management as well as internal change.’
Many European banks have turnred to Grant
Thornton when borrowers face a problem. The
skills within banks’ workout teams are certainly
a key determinant of any risk management
process, but external advisors can add value
in more difficult situations by providing
independent, objective data and exit scenarios
or supporting management to develop and
implement effective restructuring plans.
One dynamic within complex balance sheet
restructurings is gaining consensus within and
between different creditor classes. ‘When
creditors have credit default insurance that
only pays out on a terminal event, not on a
consensual restructuring, or when they have
bought into debt structures at a deep discount
from an original lender, their exit recovery
targets are different to par creditors,’ Byers
remarks. Some bank credit committees have
less experience with overseas legal frameworks,
and, more importantly, cultural differences in
cross-border transactions. This is particularly
relevant with several banks under pressure to
pull back to domestic lending, putting further
tension in syndicate decision making.
When an insolvency is unavoidable,
Grant Thornton partners act as insolvency
practitioners within the majority of Anglo-
Saxon law countries. Using the right insolvency
professionals and legal teams in each jurisdiction
can have a major impact on loan recoveries.
Facing the future
Banks have to consider how the environment
will change in light of the events of the last two
years, not least in terms of insolvency reform
and changes in regulation.
‘UNCI TRAL has developed a model
insolvency law and has led efforts to encourage
the cross-border recognition of foreign
insolvency procedures and cooperation
between national court systems, but there are
still many challenges arising from the cultural
differences between creditor and debtor
orientated insolvency systems.’ notes Byers.
‘What does the future hold? In the near term
banks will be addressing their own balance
sheets and securing their capital and liquidity
positions. Lending policies will be conservative
for some time with a heavy emphasis placed
on overhauling governance and control systems
following the shocks of Lehman and Madoff.
Some positive forms of lending may support
consolidation within certain industries where
better run and capitalised businesses can
absorb weaker players.’
Grant Thornton’s response is to help clients
formulate defensive action plans, based on
clear principles, such as focusing on liquidity,
identifying opportunities to degear, getting
closer to lenders, and rigorous cost control.
Byers believes that to help banks and
corporates come through a crisis, financial
advisors need many strengths: cross-border
reach that combines local knowledge with
deep experience and commercial mindsets.
Additional multi-disciplinary inputs and sector
specialists may be needed on larger cases.
Grant Thornton remains committed to support
lenders and their customers to weather the
current storm. |
