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Managing Troubled Assets
Portfolio Management Series Webinar
Introductions
 Ray Waters
– President, Enterprise Detroit
 You, the participants
– Small and Large CDFIs
– Credit Unions and Banks
– Consultants
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Overarching Themes
 Jump on problems early
– Much easier to bring a loan that is 15 days past due to
current than to rescue a loan 120 days past due
 Diagnose the situation
– Why is the borrower not paying?
– What is really going on?
 Protect collateral, security interests
– What is your recourse if the borrower and loan fail?
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
The Risk Grading System
 Enterprise Detroit uses a risk grading system that goes from 1
(best) to 8 (worst)
 All loans are assigned a grade at closing
– Starting grades are usually a “4” or a “5”
 Risk grades are adjusted upwards or downwards as necessary
 By “Troubled Assets” we primarily mean
– Loans on the Watch List (risk grade “6” in this
presentation)
– Loans on the Problem Asset List (risk grade “7” in this
presentation)
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Progression from Past Due to Charge-Off
 Past Due List, Delinquency
 Watch List
– Borrowers late on payment, haven’t submitted financials or
other required information
– Risk rating downgrade from 5 to 6
 Problem Asset List
– Borrowers with significant deterioration in financial condition
– Risk rating downgrade from 6 to 7
 Non-Accrual Status
– Subset of the problem asset list
– All payment goes to principal reduction
– Last resort before write-off
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Watch List (“6”) Description
Risk Factor
Status
Cash Flow
Borrower makes payments but calculated cash flow might not cover
principal. Improvement in cash flow is uncertain. Borrower struggles
to keep taxes current.
Balance Sheet
High debt/worth ratio (>5:1). Perhaps negative working capital. May
be slow in paying accounts payable.
Management
Capacity
Management is inadequate, lacks depth, serious organizational
shortcomings. FICO >/= 640
Collateral
CCR less than 0.75
LTV greater than 1.2
Industry/Market
Business has tough competition, relies on commodity pricing, or been
negatively impacted by economic trends. Tough to make a profit.
Ability to Produce
Financials
Business produces reliable financial statements at least twice/year.
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Problem Loan (“7”) Description
Risk Factor
Status
Cash Flow
Cash flow does not cover interest payments. Borrower
struggles to keep loan current. Taxes are past due.
Balance Sheet
Negative or no net worth. Negative working capital. Very slow in
paying accounts payable.
Management
Capacity
Management struggling to demonstrate s/he has a viable
business model. FICO <640
Collateral
Loan is for all practical purposes, unsecured.
Industry/Market
Significant deterioration in market has manifested itself in severe
weakness in the borrower.
Ability to Produce
Financials
Business has not produced reliable financials at least twice per
year.
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Watch List
 Typically flagged by loan officer: late on payment, hasn’t
submitted financials or other required information
 Loan officer can recommend downgrade of loan from 5 to a
6
 Watch list candidate can also be identified from Portfolio
Quality Report
 At weekly staff meeting, talk about every problem loan and
what to do for each of them
 First step is lender visit -- get assessment of situation
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Problem Loan List
 Significant deterioration in financial heath of borrower.
 Run UCC checks, new credit check, check if any new liens have
been filed.
 Try to determine what is the real situation.
 Often means re-structure; forbearance agreements.
 With 7s and some 6s, it’s an exercise in bird-dogging. Force
them to meet with us.
 Goal is not to write a company off. Better to restructure to fit the
situation than to write off and go after the collateral.
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Loan scrutiny should be dictated by the loan policy
and driven by the risk grade.
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Loan scrutiny should be dictated by the loan policy and driven by the risk grade.
Credit Grade
Loan Size
< $50m
4
5
6
7
Borrower submits semi
Copy of Income Taxes,
Copy of Income Taxes,
annual or quarterly
business and personal, business and personal, within
F/S Requirements
financials
within 180 days of FYE
180 days of FYE
Review Annually- Notes on Lender reviews tax returns, Monthly update in PQR and
Lender Review
F/S
Notes on returns
Special Assets Committee
Rating based solely upon
Monthly update in PQR and
Risk Manager
Annual Risk Rating Review receipt of tax returns and
Special Assets Committee
Review
payment history
Upgrade, Work Out or Payoff
Additional
Plan
As Directed by Special Assets
none required
none required
Site Visits
Committee
Based upon Upgrade, Work
Customer
Annually
Semi-annually
Out or Payoff plan
Contact
Upon downgrade pull new
Credit Report, lien search,
Other
double check closing
documents
CDFI Fund Capacity Building Initiative
Copy of Income Taxes,
business and personal, within
180 days of FYE
Monthly update in PQR and
Special Assets Committee
Monthly update in PQR and
Special Assets Committee
Work Out, Payoff or Liquidation
plan
As Directed by Special Assets
Committee
Based upon Work Out, Payoff
or Liquidation plan
Managing Troubled Assets
An action plan should be devised for each past due,
watch list and problem loan.
CDFI Fund Capacity Building Initiative
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Credit Status & Action Items Report
Company Name, Credit Status and
Action Items
Action Items
Borrower:
Underlying
Problem:
When will
Strategy/
loan be
Status
Action Items: moved out or Report:
upgraded?
Date
Preparer
Action
Items:
Responsible
Parties:
Due
Date:
Past Due List
Loan #1
Loan #2
Watch List
Loan #3
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Working with Difficult Borrowers
 Common reasons why borrowers don’t pay:
– Cash flow problems
– More pressure from other creditors
– Thinking you are their “partner” – not being tough enough
 How to determine the truth:
– Dig through their financials
– Be hands-on
– “We trusted you to give you a loan; you have to be honest with
us”
– Check credit scores; tax returns; personal financial
statements
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Working with Difficult Borrowers (cont’d)
 Negotiation tactics
 Default interest rate
 Obtain more collateral
 Forbearance agreement
 Restructuring
– If the borrower agrees to certain conditions
 Monitoring, review and update protocols
 Documentation
– Items to include in the loan file
CDFI Fund Capacity Building Initiative
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Collateral
 Write-ups must show the collateral you have
 Calculate your risk exposure
– For example, in declining housing market, re-assess value of
collateral
– Risk & Compliance Manager role
 Protect your collateral interests; maintain collateral files
– Must have mortgages, liens, collateral in line
– Tickler system to make sure everything is current
 Appropriate Staffing
– One person should be responsible for maintaining all UCCs,
liens, mortgages, discharging mortgages, etc.
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Work-Out Strategies
 Restructuring loans
– When to do restructure; when not to restructure
– Calculating ability to pay
– Determining appropriate terms
 Use of forbearance agreements
 Essential to have accurate valuation of collateral
 Check personal guarantors
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Worst-Case Scenarios
 Foreclosure processes
 Putting it out to collection
 Collateral
 Personal judgments
 Legal issues
 Public relations/bad press
 What to do with REO
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Wrap-Up
This presentation is part of a series of four webinars, including:




CDFI Loan Policies and Procedures
Raising Debt and Equity from External Sources
Risk-Assessing Your Own Organization
Managing Troubled Assets
To participate in upcoming webinars, register at:
http://www.carseyinstitute.unh.edu/CDFI-webinars.html
For more information about the CDFI Fund’s Capacity Building
Initiative, please visit:
http://www.cdfifund.gov
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Wrap-Up
Sample documents, etc. will be available as part of a Resource
Bank on the CDFI Fund’s Capacity Building Initiative webpage
later this summer. Please see http://www.cdfifund.gov/cbi to
view the Resource Bank and other helpful information on the
Capacity Building Initiative.
As part of the CDFI Fund’s Capacity Building Initiative, free
Technical Assistance (TA) and Organizational Assessments are
available to certified and emerging CDFIs. To sign up, e-mail:
Jack Northrup at jack@nemarketresearch.com or Eric Hangen
at ehangen@i2community.org
If you have not taken the survey, please do so at the following
link: http://www.unh.edu/survey-center/cdfi.html
CDFI Fund Capacity Building Initiative
Managing Troubled Assets
Managing Troubled Assets
Thanks for being with us today!
CDFI Fund Capacity Building Initiative
Managing Troubled Assets