More on the topic of the borrower perspective (and tips) on workouts, and in recognition that every lender and servicer needs to understand this perspective as it crafts a strategy and then executes it (first posting; second posting).
No doubt, in every distressed debt situation, it is very, very important to understand and assess all of the economic variables and conditions relating to the collateral, the borrower, the sponsor and the market surrounding (or effecting) the collateral. I call this the “economic rubric.”
But a workout is more than simply an economic rubric; it is very much a piece of art.
Let’s focus for a moment on the “art” of a workout – and while I’ll paint this from the borrower’s perspective, every lender and servicer will benefit by studying this pallet.
What do I mean by art?
Conversations and communication between borrower and lender (or servicer) in a workout are an artful combination of nuance, bluntness, toughness and even kindness. Knowing “when” to say something, and “how” to do it, is the art.
Here are some tips:
- Understand the Other Side: gather information about the lender. For example:
- Use Google Reader to search the web for information about the other side from news sources, blogs and twitter (read my instructions on "how" so set this up)
- If the lender is regulated, look at the call the federal reports at the FFIEC website
- Is the lender also in financial distress?
- Try to determine if the lender has written down the loan
- Assess how different scenarios or outcomes (bankruptcy of borrower, loan modification, deed-in-lieu, foreclosure, etc.) will effect the lender; what is the lender’s optimal end game or result, and why?
- How experienced is the lender in workouts?
- How many distressed loan or credits does the officer or manager handle?
- What is the internal reporting process or decision tree? Who has authority to make a decision; and how quickly will decisions be made?
- What is the communication style, approach or method used by the other person?
- Remember Your End Game: Do not get side tracked or distracted by gamesmanship of the other side. Stay on task. Focus.
- Silence Can Be Golden: remember, in some conversations, silence can be very, very effective. A pause in your comments can be powerful. And, it can be wise to simply say “we’ll get back to you about X.”
- Time On the Conversation Clock: some people simply like to talk, and talk and talk – probably using the approach of “heshe who talks the most wins.” Try this strategy when you encounter that talking head case: “You have been talking for 3 minutes without giving meus an opportunity to make this a conversation. I suggest that we divide up the clock to give all of us the opportunity to have a beneficial dialogue. If your goal is simply to give a speech, then we’ll need to [get off the callleave the room]."
- Be Credible: borrower (and its counsel) should be honest and transparent.
- Story Board the Conversation: at the very beginning, and before key conversations or communications, take the time to envision different scenarios or outcomes that could flow from those conversations or communications.
- Avoid Creating Your Own Bear Trap: importantly, strive to avoid creating an electronic or paper record of your discussions and analysis that form the basis of your objectives and strategy. These internal written (paper or electronic) discussions surrounding could be “discovered” by the other side in future litigation. Get up out of your chair and talk about it. Do not leave voicemails about it. Engage your lawyer to obtain important information. In all of your written (electronic or paper) communication, and in voicemails (remember, they are stored electronically), remember that the content will be discovered in any litigation. Better yet, discuss this topic (and the topic of "privilege") with your lawyer. (Tips on oral communication.)
- Communication Strategy: while silence in a conversation can be powerful, it is best to promptly communicate news to the lender about the property. Decide “who” will furnish information, and do so via a means that will keep a good record – such as using e-mail (and attaching reports and information as a PDF). Of course, there are exceptions to this prompt communication approach, such as if the event is a loan document default. However, if and when this occurs, borrower still should disclose it AFTER assessing the possible consequences of the situation. At that juncture, the artful state of a workout probably has come to an end.
- Don’t Make It Personal
- Avoid Hot Buttons; Land On Good Buttons (do this; don’t do this)
I know that this list is NOT complete. What could you add to this list?