The aging population is another increasingly significant factor.
Currently, more than 14% of our population is over 65 and that number
is expected to explode in the coming years. To determine what this could
mean for a business, first consider the customer base. Some companies, like pharmaceuticals, may benefit from an aging population. Other
industries, like builders of large, high-end homes, may be hurt.
How will aging affect the company itself? Are any of the key
members of the management team likely to retire during the term of
your loan? How dependent is the borrower’s survival on an aging
team? How much time do you likely have to exit safely if key employees
retire or expire? Expect to see more retirements in 2017 than you’ve
ever seen before.
Several finance industry insiders report many lenders are ushering
borrowers into bankruptcy or liquidation without considering a turnaround. According to the Federal Reserve, delinquency rates on leases
and commercial and industrial (C&I) loans are up, respectively, from
.69 and .72 in Q4/14 to 1.03 and 1.58 in Q3/16. Particularly on the C&I
side, that’s a substantial jump. You might expect to see a proportionate
uptick in Chapter 11 filings, perhaps with a few months’ lag.
Yet, the increase in business Chapter 11 and Chapter 7 filings during
this period was modest, from 6,069 to 6,993. Furthermore, the number
of Chapter 11 cases was essentially flat while the number of Chapter 7
cases grew by nearly 20%. As you can see in Figure 1, delinquencies
and filings are highly correlated, but the two lines have recently intersected (delinquencies up and Chapter 11 filings down), while Chapter 7
filings are up a bit, indicating more liquidations per delinquency.
While this doesn’t provide a definitive confirmation of the perceived
trend, this evidence leads us to suggest that lenders in troubled loans
should look at the potential for a turnaround or a sale at the first signs
of distress. All too often, value is lost while management tries to turn
things around or sell the business without assistance from a professional. Before the company is out of runway and liquidation becomes
the only option, the lender should encourage the borrower to try to
fix the business or sell it as a going concern. Be persistent and make
introductions to qualified professionals. In most cases, the recovery
in a going concern sale will far exceed liquidation value, a truth that
seems magnified coming into 2017.
Throughout 2016, my partners and I observed a few trends and dynamics that lenders should note as they consider how to best exit troubled
loans in 2017.
Global Economic Impact
Fiscal policy, exchange rates and trade policies will
have significant impact on many businesses. As a
lender, you cannot afford to ignore where in the world
your borrower’s customers, competitors and suppliers
are based. Monetary policy, uncertainty about U.S.
stability and potential for growth and issues outside
U.S. borders (like Brexit) all have an impact on relevant
exchange rates. From mid-April through late-November
2016, the U.S. dollar had a strong run: up 7.7% against
the Chinese yuan, 8% against the Canadian dollar and
10.4% against the euro.
As the currency markets swing, consider the impact
this might have on your borrowers. Importers benefit
from a strong dollar while exporters may find it challenging to compete and make money. The strong U.S.
dollar can make it difficult to sell a business to a foreign
entity, yet high tariffs may encourage foreign companies
to buy U.S. operations. The law of unintended consequences looms large on the tariff issue. On the surface,
tariffs would obviously help some domestic manufacturers compete, but would hurt the many U.S. companies that buy components from overseas manufacturers.
President Donald Trump’s tariffs could lead to trade
wars and high tariffs placed on your borrowers’ exports.
Workout Considerations to Make
2017 “A Happy New Year”
BY KEN MANN
Even lenders who exercise the most thorough due diligence sometimes have to exit their loans.
Turnaround specialist Ken Mann offers tips to help lenders make smart decisions in 2017.
Fiscal policy, exchange rates and trade policies will have
significant impact on many businesses. As a lender, you cannot
afford to ignore where in the world your borrower’s customers,
competitors and suppliers are based.
Senior Managing Director,
Heritage Equity Partners