Guidelines on Management of Problem Loans

Developing the Negotiating Strategy Restructuring plan should be viable and mutually acceptable. As every restructuring is unique, depending on borrower and the executing team, the notion of the strategy should keep, following things in mind before drafting the plan: • Restructuring a loan, which is under stress, means introducing changes that will make underlying business viable and profitable once again and to implement changes so that it will generate enough cash flow to cover the service of loan and satisfactorily returns to shareholders. It is important to understand the underlying causes of the problem. • The restructuring is more than just changing the terms and structure of the facility, as it focuses on sustainable business. • Economic profitability should be priorities over accounting profitability while restructuring. The objective is to render the company viable and to ensure its continuity. A. Better Practices for approaching negotiation in an efficient manner i. Preparation is essential before the negotiation starts: Every negotiation requires preparation and a strategy to implement. During their preparation, the bank can propose and determine how the possible refinancing is going to be distributed, under what conditions, and subject to what limits and guarantees. Negotiating strategy and tactics should include identification of the negotiable points, possible counter-proposals from the banks, and matters kept in reserve (if possible) to be raised during the process. a. Be Prepared - It is not possible to draw up a restructuring strategy without a reliable resolvability analysis. The bank should review all available information of the company and current state of business sector, identify the reason and nature of the distress situation. b. Evaluate the position - Bank should evaluate its ranking in terms of security among the other creditors and stakeholders. The bank should also assess the number and value of secured claims in relation to other secured and unsecured creditors, ii. Keep the borrower informed: For a successful negotiation, the bank should inform all the stakeholders and be involved actively in talks about the negotiation progress. Successful restructuring is a team effort. Success requires that borrowers work closely with their investment partners. In a restructuring, investors are not only shareholders but also supporting financial entities. For managers the challenge is always to be a step ahead by preparing the (eventual) next round: to be transparent, and to communicate effectively. iii. Consistency will deliver results: At this crucial stage in a company's life, inconsistency in communication or strategy can be detrimental. Some ways to be consistent: a) Draw up a consistent and credible action plan to improve the company's liquidity. Determine the financial needs in the short, medium and long term. b) Be consistent in the plan: try to cover short-term needs with short-term funds, and long-term needs with long-term funds. c) Do not equate restructuring with loan renegotiation n. Long-term needs can and must be financed by converting loan to equity, whenever the level of leverage is excessive. d) When converting loan to equity, negotiate in detail the value of the stake held by the new shareholders or look for alternative sources of capital. e) Finally, the success of the restructuring depends to a large extent on the company surrounding itself by qualified advisors who can offer the benefit of their experience. iv. A restructuring process consists of reaching a private agreement in order to prevent legal proceedings. It is also possible to base the agreement on corresponding bankruptcy law, although it would have to be under judicial protection and subject to regulations that are often more rigid (creditors agreement). B. SWOT (Strengths, weaknesses, opportunities, threats) Analysis While negotiating the rehabilitation plan, the bank should identify and evaluate the strengths and weaknesses i