The last ten years of expansion yielded growth for banks in a calm economic climate—resulting in fewer problem credits, less need for a robust special assets department, and lower loan loss provisions and reserves (LLRs).
Since the pandemic struck the U.S. in March, shuttering businesses and causing massive unemployment, the banking industry finds itself at a crossroads. Borrowers from both commercial and consumer sectors are now challenged to meet contractual loan obligations.
The question at hand is how will banks manage the likely deterioration in asset quality and rise in problem credits? Will there be a rush to enlarge workout departments and hire expensive workout talent in a market where demand may outstrip supply?
The banking attorneys and advisors at Woods Rogers offer a Special Assets team as an outsource partner for financial institutions. This group is able to bring financial services counsel on an as-needed project basis.
Here are the financial sector areas that will need a closer look to plan for likely deterioration in asset quality and rise in problem credits:
Workouts Management and Forbearance Agreements
We have represented purchasers of distressed businesses in all stages of an acquisition in bankruptcy, from initial due diligence, negotiating and drafting transaction documents and procedural pleadings, to the final closing. Our attorneys have represented private equity clients as well in acquisitions and workouts of distressed companies. We have also coordinated and managed real estate liens and forbearance agreements.
Compliance and Corporate Governance
Our attorneys have banking regulatory knowledge and experience in dealing with problem credits and special assets. We are often asked to interpret guidance on regulations from the OCC, Federal Reserve, FDIC, and NCUA for our financial services clients. We also assist with federal and state regulatory filings and other regulatory issues—from SEC reporting and securities matters to mergers and acquisitions. In addition, we operate a compliance hotline for a sector of the financial services industry.
Credit Risk and Loan Documentation Review
Against the backdrop of an uncertain economy, managing credit risk is one of the most complex challenges for lenders. Our attorneys and advisory staff have represented banks in commercial loan closings ranging in size from $1M to $75M. All of our work involves evaluation of credit risk and review of loan documents, often with numerous modifications and sometimes involving multiple parties. We have represented banks in traditional as well as hybrid financings.
Our attorneys have represented distressed borrowers, lenders, and other creditors in a variety of industries including distribution and logistics, energy, financial services, health care, manufacturing, retail, and technology. Our guidance includes solutions for restructuring transactions and loans both inside and outside of the bankruptcy process. One of the attorneys in this group is a Chapter 11 Subchapter V Trustee.
In the rush of Paycheck Protection Program (PPP) loan applications, our attorneys helped individuals and business owners navigate the complicated system. We have tracked changes and pitfalls along the way, advising clients on documenting the loan justification, considerations about how the loan may be used, and now reviewing the forgiveness application to ensure all facts and figures are in order. In addition, we have worked with our bank clients to clarify issues associated with the Bank Secrecy Act’s know-your-customer requirements under the PPP.