June 26, 2013
The term workout as defined in the SOP 50 57 is “the debt collection and negotiation process as well as the final plan agreed upon by a creditor and debtor with regard to how the problems and issues surrounding the debtor’s delinquent obligation to the creditor can be ‘worked out’ or resolved.” There are a variety of alternative workout strategies but generally all involve the restructuring of the material terms and conditions of the debtor’s delinquent loan. The goals of a workout are to avoid a foreclosure or bankruptcy, enable the debtor to cure defaults and improve repayment ability and to maximize recovery on the loan for the creditor.
The SBA requires that whenever feasible, a good faith effort must be made to negotiate a workout on an SBA loan that is seriously delinquent or classified in liquidation. This means that failure by the lender to make an effort at a workout could result in a denial or repair. If the lender does not make an effort at a workout, the reason should be well documented.
While there are several alternatives for a workout, all must start with obtaining updated financials from the debtor. The creditor should obtain a current financial statement that should be signed under penalty of perjury and must show debtor’s assets, liabilities, income and expenses. In addition, the lender should obtain the debtor’s last year-end financial statements, current consolidated financial statement of any affiliates and complete business and personal tax returns for the prior two years. If the debtor refuses to provide this information, workout negotiations should not be pursued.
Once the financial information is obtained, the lender should determine if a workout is feasible. In order to do so, he lender should consider the financial information, whether the debtor has the technical and management skills, and whether the debtor is cooperative, acting in good faith and is financially and operationally viable. If the workout is determined to be feasible, negotiations should begin immediately and implemented as soon as possible. The lender should not let negotiations drag on. If an acceptable workout is not in place within sixty days, the lender generally should proceed with its plan for enforced debt collection.
As part of the workout, the debtor must provide “consideration” to make the agreement binding. That is, the debtor must provide something of value in exchange for the benefit of the workout. Generally, debtors should be required to correct loan document errors, waive defenses, release lender liability claims, provide additional collateral when possible and consent to a speedy and inexpensive method of liquidating the loan if the workout fails.
There are many possible types of workouts to consider. When making the final decision on which to pursue, the lender should document the justification for that decision. As part of its documentation, the lender should have an updated credit memo that includes cash flow and complete liquidation analysis based the most current financial and other information provided by the borrower. The SOP enumerates the most common types of workouts which include: forbearance; reinstatement of maturity date; deferment; modification of repayment terms of note; assumption of loan; subordination of working capital loan; relief on secured senior loan; and voluntary sale of collateral.
When a borrower is in trouble it is not only prudent, but required, to consider a workout. Successful workouts help lenders maximize recovery and promote the goals of the SBA.
For more information on structuring workouts on SBA loans, contact Bart at 949.333-4108 or at email@example.com.