What your banker will never tell you – Part 2
|By Development Finance Partners / Matthew Royal|
As promised, in part 2 of “What your banker will never tell you” I will give you valuable insight into some of the general principles which Development Finance Partners uses to negotiate favourable outcomes with your bank/banker in times of stress and pressure, where a development went toxic, a workout strategy is required and debt restructuring is crucial to get out of a sticky situation.
So under which circumstances will a bank/banker consider negotiating favourable outcomes with a customer whose credit position is deemed to have deteriorated and needs to be exited from the bank? More importantly, how does the poor helpless victim (i.e. the customer/borrower/guarantor) effectively communicate their position, needs, objectives and concerns – and what support they require?
You will note I have referred separately to the banker and the bank at which he or she is employed; there is good reason for this. It is important to make this distinction because we are not negotiating and communicating with a faceless institution. We are dealing with different personality types and authority levels, all with varying individual agendas and objectives. Having had the benefit of several years of experience working as a manager within a property finance unit of a bank and other major financial institutions, I understand the absolute importance of knowing how to manage different personalities within a bank (not to mention the internal politics at play!).
Like all things in life, you can’t go wrong if you focus on getting the basic principles right. While every situation is different, at Development Finance Partners we adopt a similar approach when developing a workout strategy and negotiating favourable outcomes for our clients with their bankers and banks.
1. Confessional time
The first step in the process is what we like to call confessional time. This is where we spend as much time as necessary drawing out the good, the bad and the ugly. Sometimes this is called discovery, diagnosis or due diligence. Regardless of what you call it, it is vital that we obtain full disclosure of all of the facts of the background events leading up to the current less-than-perfect state of affairs.
We often find that our clients are presenting as battle weary after years of GFC-induced stress and pressure. Their decision-making is usually highly reactive and focused on trying to put out one fire after the next. There is no clear strategy other than survival. The quality of decisions made in this environment is, as you can imagine, less than perfect and likely to lead to the client taking progressively higher risks to try to recover their position.
2. Developing an agreed workout strategy and objectives
Having established a detailed understanding of what we are working with – and putting aside all emotion, biases, conspiracy theories, blame and emotional baggage – we can get on with focusing on the client’s real objectives. The aim is to advise them of what is achievable and what is required to reach that agreed set of objectives.
The most critical element of any successful workout strategy is to ensure the interests of all key stakeholders are thoroughly considered and aligned towards the successful attainment of the agreed objectives. Once we have established an achievable set of objectives and strategy, especially after a sustained period of operating in survival mode, our clients often gain a renewed sense of determination and focus.
3. Turning the debt restructure plans into reality
Working backwards from the agreed set of objectives, we work with the client to allocate the various sub-projects and tasks, and set a budget and timeline. This forms the basis of an accountable framework upon which we can report to various stakeholders, including the bank/s, shareholders, directors and other creditors.
An essential element to any workout is to develop a debt restructure strategy which achieves the objectives of all stakeholders in order to achieve an overall greatly improved position for our client. The trick is to understand the real objectives of your banker/bank.
Depending on the depth and extent of the borrower’s credit impairment, the banker/bank’s objectives may be more different than you understand. For example, the banker/bank’s objectives, if we are dealing with mild to moderate interest arrears, are very different than those of the borrower who has a mild to moderate Loan to Value Ratio (LVR) default on an expired construction loan which has failed to sell despite genuine efforts to do so.
Communicating the agreed workout strategy and seeking the required support from the key stakeholders within the context of the abovementioned accountable framework is the next critical step towards success. An important safety warning is required at this point! Prepare, prepare, prepare … and deliver.
A common source of frustration for a banker is when their client promises certain things will happen and they do not eventuate. Such a scenario quickly erodes the relationship and, in many cases, this has already happened a number of times prior to Development Finance Partners being engaged. In the post-GFC world, this type of frustration has become a daily occurrence which has resulted in bankers and their credit managers becoming increasingly sceptical. So the presentation of any workout strategy must be heavily evidence-based in order for it to be credible, bankable, supportable and defensible.
Why is reasonable evidence so important to your banker and his or her credit manager? Well, simply put, by providing reasonable evidence to support the basis of our workout strategy (requests), we are providing our clients’ banker/s (whose careers and credibility are at stake) with the confidence they need to justify and defend their decision to support our proposal. Apart from being evidence-based, the key elements of a workout proposal must be:
- confidence-delivering, with the deliverable track record of the project control group providing stakeholders with the confidence that they are capable of successfully completing each of the tasks
- heavily success driven and highly accountable in the engagement of the project control group
- rigorous, containing regular reporting intervals tracking actuals to forecasts
- presented and negotiated by a suitably qualified professional adviser such as Development Finance Partners
- based on conservative high and low forecasts.
It has been my experience that regular, no-nonsense, transparent and independent reporting builds valuable goodwill, relationships, trust and ongoing co-operation with the banker/bank. The process of a workout is often a fluid and dynamic process resulting in the need for minor variations and the agreed objectives to be reasonably renegotiated with the banker/bank. The elements I’ve described will support this process to occur all the way until the final settlement of the matter has been resolved.
By adopting this pragmatic and disciplined approach to debt workouts, Development Finance Partners has added tremendous value to our clients and their banks. Practically, this approach has been used to great effect as can be seen in this Medowie Woolworths case study
Please feel free to contact me on firstname.lastname@example.org or any of the Development Finance Partners team members https://www.dfpartners.com.au/about-us/team/ to discuss our debt advisory workout service in more detail. And, remember, we have the experience to know what your banker will never tell you.
Missed part 1 of “What your banker will never tell you”? Read it here!
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