In the first one of these Commercial Real Estate Loan Workout posts I introduced you to the recent FDIC Policy Statement on Prudent Commercial Real Estate Loan Workouts. In this post I’m going to follow up on that and work through summarizing more of that document.
B. Classification of Renewals or Restructurings of Maturing Loans
Many borrowers whose loans mature in the midst of an economic crisis have difficulty obtaining short-term financing or adequate sources of long-term credit due to deterioration in collateral values despite their current ability to service the debt. In such cases, institutions may determine that the most appropriate and prudent course is to restructure or renew loans to existing borrowers who have demonstrated an ability to pay their debts, but who may not be in a position, at the time of the loan’s maturity, to obtain long-term financing. The regulators recognize that prudent loan workout agreements or restructurings are generally in the best interest of both the institution and the borrower.
READ: as long as we’re in this credit crunch if your CRE loans are due and a refi is not possible for whatever reason, as long as the borrower can pay, you work out how you see fit, we understand and we’ll be patient.
The next few sections don’t provide us much insight as distressed asset deal makers but I think it is informative to see how the FDIC would like the banks to be thinking.
C. Classification of Troubled CRE Loans Dependent on the Sale of Collateral for Repayment
This section speak specifically to how to classify the loss or potential for loss with a CRE loan. Specifically it indicates that when the sale of CRE is necessary to repay a loan the amount that that property is under water should be classified as “doubtful” but use that term sparingly.
D. Classification and Accrual Treatment of Restructured Loans with a Partial Charge-off
When you restructure a loan and charge off a piece the remainder of the loan is at worst substandard (rather than ‘doubtful’). It goes on to say that one workout strategy might be to separate the loan into two enforceable loans, and then you put the senior piece on your books as ‘accrual’ in many cases (meaning ‘its all good’).
A. Implications for Interest Accrual
If you restructure a loan that is not already in nonaccrual keep it out of there but document everything. If the restructuring happens after it hits nonaccrual then you’re going to need 6 months more of good history before you move it back to accrual.
I think the lesson here if you’re a CRE borrower is that you should be working hard to modify or restructure your loan BEFORE you get into trouble. Why? Because its much easier for the bank to deal with. They can keep your note in a nice safe warm accrual place and they don’t have to be all over you for months. One interesting side note in this section is that it says:
A sustained period of repayment performance generally would be a minimum of six months and would involve payments of cash or cash equivalents.
If anyone can tell me what the cash equivalent is I’d love to hear about it in the comments. Do interest reserves count?
The paper goes on with about 14 pages of commercial loan workout examples and several pages of attachments. Anyone working to restructure CRE loans for borrowers or those working with banks should read these.
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