16.03.2009

Distressed loans

In the current climate, many borrowers are faced with the need to restructure their debts under due to the lack of funds for loan servicing and the banks’ changing conditions of credit. Proposals made by the borrowers to adjust the credit conditions according to the changed needs of the borrowers are not often accepted by the banks. Having analyzed the factors influencing the banks’ inclination to restructuring the loan liabilities, we arrived at the conclusion that, in some cases, the borrowers and banks do not fully utilize the potential to reach mutually beneficial decisions. In particular, this is determined by the fact that when the borrowers make their proposals to the banks, they do not always take into consideration provisions of the legislation regulating the procedure for determining the regulatory capital of the lending bank and its economic standards.
 
In turn, in the conditions of the financial crisis and insufficient liquidity in the banking sector, the key factor influencing the bank’s actions is the observance of the stipulated economic standards and standards of regulatory capital. In order to assist the lending bank to observe these criteria, the borrower’s proposal concerning the loan restructuring ought to comply with the following demands:
  • To improve the standards of credit risk
  • To decrease the risk classification of the assets that ensure execution of the credit liabilities
  • To increase the credit capacity of the borrower and the guarantors
  • To decrease the concentration of credit risks
  • To decrease the number of nonstandard active bank operations, dubious accrued profits and negatively classified assets
  • To reduce the reserve index for covering losses under the credit operations
 
Usually, the bank is very well aware, what it needs to improve is its standards. Along with that, the bank quite often does not know whether the borrower is capable of meeting the banks’ needs if those standards become higher. This is conditioned by the crediting practice of recent years – in their rush to conclude more loan agreements, the banks superficially estimated the credit risks and sometimes assist the borrowers in providing non-liquid and insecure funds. Now, due to the influence of the crisis circumstances and requirements of the NBU, the banks re-estimate the loan risks, transfer the granted loans in more risky categories and, accordingly, seek to shift the increasing debt burden on the borrowers. In such conditions, it became important for the borrowers to offer their lending banks such restructuring conditions that will enable the banks to improve their standards without increasing the load of the borrowers. Furthermore, the bank may benefit from the loan restructuring in perspective of obtaining the opportunity of refinancing from the National Bank of Ukraine, and it is important for the borrower to know what to offer to his lending bank and how to benefit from it himself.
 
The bank may not know about the borrower’s resources both due to the incomplete disclosure of information by the borrower regarding his actual capacity and due to the lack of knowledge of the borrower regarding his opportunities to assist the lending bank without increasing the value of the loan and other burdening conditions. If the problems in receiving a loan occur because of the borrower’s reluctance to transfer certain assets under the bank’s control, then, in our opinion, the borrower may have unrealized potential for providing the bank with the security acceptable for both the bank and the borrower. We arrive at this conclusion relying on the fact that in many cases, the financing structures, structures for holding the assets and distributing the cash flows among the borrowers allow for further optimization. In such a case, it is possible to restructure in a manner that provides the banks with the securities and guaranties satisfying the banks and, at the same time, not causing any threats to the the borrowers’ well-being. If the problems in receiving a loan occur because of the lack of knowledge both on the part of the bank and the borrower about the available potential for restructuring the debt, we see our task as identifying this potential and making the acceptable proposal to the bank on the conditions beneficial for the borrower.
 
As a rule, achievement of the following targets envisages execution of the following duties by a lawyer:
  • Analysis of the current credit relations with the bank and their classification in the bank accounting
  • Analysis of the current structure of the borrower and guarantor (the corporate ownership, cash flows)
  • Identification of the unrealized potential and increase of the credit capacity indexes of the borrower
  • Restructuring of the corporate organization and organization of the ownership and cash flows relations in the borrower’s structure both in Ukraine and abroad
  • Preparation of proposals to the banks, negotiating and drafting all the necessary legal documentation
 
We can individually single out the services for offsetting the mutual claims of the borrowers and the banks. For execution of the active operations with the borrowers, the banks execute the passive operations with their creditors, for example, by attracting interbank loans, issuing bonds and involving deposits. In the conditions of the financial crisis, the banks’ bonds (both internal and Eurobonds) are traded on the markets with a significant discount. Redemption of such bank debts by the borrower (or by the structure affiliated with the borrower) provides the borrower with the means for offsetting the mutual claims with the bank. If this transaction is successfully accomplished, it is possible, for example, to repay a loan for 50-60% per cent of its amount. Utilization of foreign-affiliated structures extends the execution possibilities of such transactions, since it makes the redemption of the foreign bank debts, for example of the Eurobonds, possible. Redemption from depositors of their claims under the deposits and using them for offsetting the loan liabilities is also possible. Another type of such a transaction is redemption of the interbank debts, including international debts, and this can be applied in restructuring significant corporate borrowings. We are ready to assist in performing the legal due diligence of existing debt relations, conducting negotiations with all the members of the restructuring and offsetting, executing all the necessary legal documentation and representing interests of the parties in dispute resolution.