Exiting the Special Assets Group
Exiting the Special Assets Group
A Company that is experiencing losses or negative trends otherwise will eventually find itself in a bank’s Special Assets Group (“SAG”). Once in SAG, the interactions between the bank and the Company may not be relationship-focused. Instead, a Company can expect to be in an uncomfortable vise. Being in SAG, a company can oftentimes expect default rates of interest, increased reporting requirements (i.e. 13-week cash flow forecast (“13 CFF”), weekly budget-to-actual variance reporting on the 13 CFF, borrowing base certificate, and disbursements review) and a requirement for a turnaround consultant.
Once in SAG, the relationship between the current lender and the Company likely will have deteriorated enough that each has major fatigue of the other, and rebuilding the relationship is impossible.
To exit the SAG, a Company will have to find a new lender which may not be easy because of the recent performance. By executing on a turnaround plan, an exit from SAG may be possible.
Planning The Exit
There is a way out of SAG.
Work with the SAG officer of the bank. The bank officer in SAG needs to report to their management. If both performance and cash management have stabilized, the bank officer in SAG can report this and the Company may be given more time to position itself. If the cash flow cannot be stabilized, it will be a different conversation and having a turnaround consultant can be very beneficial in exploring options.
Improve communication channels. This can be done by management, but an outside party may be better for this. Because of the damaged relationship with the existing lender (and likely other creditors), a turnaround advisor may be the appropriate party to improve the communications channels. Turnaround advisors are used to being in these challenging situations, and can add more credibility to the communication.
Develop and Start Executing on a Turnaround Plan. Few lenders will want to get involved with a Company that is losing money without a plan to turn it around. The turnaround plan needs to be documented and tracked against. Having a plan makes it easier for a new lender to consider getting involved with a “story” credit.
Find a New Funding Source. The turnaround firm can help chart this course. The turnaround firm can work with management to develop a teaser, Confidential Information Memorandum (“CIM”) and data room for potential lenders to evaluate the opportunity. In the CIM, the Company’s plan on returning to profitability (and measures taken to date) are emphasized.
The turnaround consultant will have a network of lenders (ABL, cash flow, specialty) to evaluate the opportunity. Since the Company is a “story” credit, traditional banks may pass and a non-bank lender may step up. The process can take some time as many financial institutions will want to see the turnaround taking hold before moving forward.
If a deal can be consummated, then the Company will have exited SAG with the refinancing.
Summary
Time in the Special Assets Group of a bank can feel overwhelming. With careful planning and execution, there is a way out!
Please contact s.grabish@finadvisr.com to learn more about how FinAdvisr.com can help.
