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How Financial Advisors Can Facilitate the Best Possible Outcomes in a Bankruptcy BY PAT DIERCKS Despite lenders’ best efforts, the bankruptcy of a borrower is faced by most lenders. Learn how partnering with a financial advisor can protect your interests.
THE SECURED LENDER MARCH 2021
Regardless of how well you vet your borrowers, there will likely be a point when you are faced with a borrower that is flirting with the need to go into a bankruptcy proceeding. The saying “knowledge is power” holds especially true in a bankruptcy case where receiving timely, accurate, relevant and unbiased information will allow you as a lender to take the appropriate actions to ensure the best outcome possible. While there are likely internal personnel and resources at most lending institutions that have had experiences with borrowers in bankruptcy, it is certainly not what they do every day, and therefore they may not be thoroughly versed in the latest changes to the Bankruptcy Code, recent rulings and other case law relevant to your borrower. When faced with this situation, it is advisable to make sure you are going into the process with professionals who have the specific expertise and up-to-date experiences of traversing the current bankruptcy landscape. Just as you would likely rely on some level of outside help in preparing to close on a new loan, having bankruptcy professionals retained prior to filing will assist you in balancing both the needs of the debtor and your own to get to the most successful outcome possible. As a lender, whether you are providing DIP financing, allowing the use of cash collateral, or are sitting in the second (or lower) position behind the senior secured lender(s), many of the decision points as to how you approach a bankruptcy will be based on the financial projections provided by the debtor and their financial advisors. Retaining a financial advisor that understands the bankruptcy process and singularly represents your interests is critical to ensuring a well-informed and smooth experience for the secured lender.
Preparation is Key A good portion of the decisionmaking process and work that allows for a well-organized/ prepared bankruptcy filing is typically completed in the two to three weeks leading up to the bankruptcy filing. This work sets the groundwork for how the case will proceed, the monetization of assets, and, probably most importantly, the parameters of how the debtor will access liquidity to continue through the PAT DIERCKS bankruptcy process. Having Clear Thinking Group, LLC financial and legal advisors in place at the start of this process will allow the secured lender greater visibility into what the best options are for them in the process. It is extremely likely that during this preparation phase that the borrower will be undergoing complex scenario modeling in trying to determine the best course of action. Models and scenarios will be constantly changing. An astute financial advisor will be able to stay on top of this process and keep the secured lender informed as to what the best and most likely outcomes are out of each scenario. Being able to provide timely and accurate information back to your credit and underwriting teams will be essential in order to get the necessary approvals to move forward with a DIP loan or allow the borrower to utilize cash collateral while operating in bankruptcy.
Keeping Your Best Interest in Mind Given the various constituents in the case (secured lenders, note holders, unsecured creditors, etc.), there will be many different views of what the best course of action will be to preserve their own interests. Many of these constituents will have their own financial advisors and legal counsel whether in a formal role such as the Unsecured Creditors Committee’s advisors or less formally to ensure that their interests are specifically being represented. A bankruptcy-savvy financial advisor will be able to assist the secured lender in weighing the benefits and risks to all the possible scenarios and pointing out those that are potentially more advantageous to one party versus another. While most constituents work very hard to march in the same direction as it is the most efficient way through the bankruptcy process, there are going to be many instances where the best interest of the debtor/ other creditors is not aligned with that of the secured lender. Just as you would never rely on the prospective borrower to do their own field exams or utilize their legal team to draft the loan documents when closing on a new loan, the secured lender needs to be mindful that the borrower/debtor’s case professionals are exactly that. Their fiduciary responsibility is to the debtor and just because something works well for the debtor does not mean it is always the best scenario for the secured lender.