Tidal Wave Expected As Unemployment Increases
April 14, 2020
BAI Banking Strategies is saying a wave of distressed loans is coming down the pike thanks to the spike in unemployment triggered by the COVID-19 crisis.
Michael D. Fielding, a partner at Husch Blackwell LLP, a Kansas City, Mo.-based law firm that advises lenders dealing with distressed loans, wrote it is imperative that lenders keep good, open lines of communication with their borrowers to understand what they are facing. Closely watch for leading indicators of financial distress, including aging accounts payable, decreases in accounts receivable and difficulties complying with loan covenants.
If the borrower is non-responsive to the lender, Fielding said, or if the borrower’s accounts are suddenly moved to another institution, that should serve as a red flag of economic distress and a possible imminent bankruptcy filing. For borrowers that are expected to need loan modifications, make sure to closely review existing loan documents to see if any defects exist that impair your lien. Loan modifications are golden opportunities to quietly fix past lender mistakes.
Fielding also wrote, “It is critical to ascertain the point at which a lender will stop working with the borrower to resolve the loan and turn to enforcement of its lien rights. Even though the CARES Act provides temporary relief to lenders on accounting for troubled debt restructurings, lenders will still need to grapple with the macro challenges to their overall cash flow and balance sheet caused by a spike in debtors struggling to stay afloat.”
Read more about distressed loans increasing.
The Bottom Line
Most financial institutions have tremendous excess capacity in their existing branches today.