Help when under supervision by Special Assets
As an entrepreneur, you work day and night to make your company a success. The Dutch economy is slowly emerging from an economic dip that has lasted several years. However, you have succeeded in keeping your business viable until now. Even so, your bank recently informed you that your company has been transferred to its special assets department; the intensive care department of the banking world. Obviously not something which you requested. So what do you do? You need to act. But where do you start, what should you do and what should you definitely not do? Most entrepreneurs who have experienced this process are anything but positive about it. Which makes sense, because the entrepreneur’s interests and those of the bank are generally diametrically opposed at this point. This article provides background information relating to the banks’ special assets departments and, even more importantly, a number of useful tips and tricks that will help you if you ever find yourself in this situation.
Exact statistics are not available, however during the crisis years, one in four or five companies were assigned to a bank’s Special Assets department for a brief or more prolonged period. Approximately 60 or 70 percent of these companies survived Special Assets and succeeded in being reassigned to their bank’s normal asset management department.
If you are unlucky enough to be transferred, many changes can be expected. You will be assigned a different account manager. The tone and content of your meetings with the bank will change. Meetings will be scheduled more regularly and your workload will increase substantially because you will have to send frequent and detailed management reports to the bank. You will pay more interest due to a higher risk premium. The bank may even impose extreme measures, such as appointing an interim Executive Board nominated by the bank, as part of the package of conditions for continuing the loan. The extra costs incurred by the bank in this respect will be charged to you. Why does this happen and what action can you take?
When and why are you transferred to Special Assets?
Important! The bank takes this decision without consulting you first. If the bank is of the opinion that the (credit) risk associated with your company has increased, it will transfer your dossier to its Special Assets department. That increased risk may for example take the form of a permanent overrun in relation to the agreed credit limit, or a reduction in the value of the collateral that has been provided, e.g. real estate. A further possibility is that your company is not necessarily performing poorly, but that the bank has taken an internal decision to investigate companies in one specific industry more closely by transferring them to Special Assets.
What are the different scenarios?
- The bank does wish to continue the relationship with you:
1. Conditional to the provision of additional business-related or personal collateral
The General Banking Terms and Conditions, which have been stated to apply by the bank, include a provision requiring the borrower to provide additional collateral at the bank’s first request. If the bank decides that it has loaned more funds than it can recover through an execution sale based on its collateral position, you must make additional collateral available in your capacity as the entrepreneur. Obviously, the request must be reasonable. In addition, consideration must be given to the type of collateral which the bank can and is permitted to request. In general, the bank will already have pledges on all (current and future) operating assets and accounts receivable. If so, the bank may require you to provide collateral in the form of personal assets, such as a private surety bond, possibly in conjunction with a mortgage right to your privately owned home. This is a radical measure and a number of special rules must be observed to ensure the validity of collateral rights. It is important to accurately analyse this situation and the possible consequences.
2. Conditional to an improvement in your company’s financial situation by implementing a reorganisation, by implementing more effective management controls or by obtaining an additional loan (refinancing)
The bank may assign you to Special Assets as a temporary measure designed to strengthen the bank’s and your control over the business. They are a minority, however the entrepreneurs who are grateful for the wake-up call which they receive in a Special Assets procedure definitely exist. In the best-case scenario, the supervision exercised by Special Assets puts you back on track as an entrepreneur by imposing a reporting obligation or by making the bank’s knowledge and expertise available to you. So the procedure may still end in success. However, the bank’s primary objective in initiating a Special Assets procedure is of great importance. Has the bank already written off the business or does it genuinely want to help the entrepreneur address the situation and return to financial health? As an entrepreneur, you need to know which category applies to your business.
- The bank does not wish to continue the relationship with you:
3. Damage control when unwinding the relationship, managing an execution sale and terminating the loan
This situation regularly occurs. In fact, it is already two minutes past rather than two minutes before midnight, and the bank has delayed transferring your business to Special Assets for too long. In this case, the bank will primarily focus on limiting its own loss when unwinding the credit relationship. However, the bank may not act irresponsibly if it decides to terminate the credit arrangement. In view of its position and social position, the bank has a duty of care. Therefore, you under no obligation to agree to anything that you consider irresponsible.
Obviously, the first thing you must do is maintain a dialogue with the bank and try to negotiate new and realistic opportunities for your company. If you are unsuccessful, you can make the bank aware of the damage which your company and you as an entrepreneur will suffer if your credit arrangement is reduced or terminated, or if an unused amount of credit is frozen. You can also submit the entire situation to a court (in a summary proceedings) and demand an emergency ruling to prevent termination of the loan. This will not improve the relationship, however a procedure of this nature is sometimes unavoidable.
Case law defines aspects which play a role when determining whether the bank has acted unlawfully or not. Even though banks are, in principle, entitled to decide to terminate a loan arrangement subject to the aforementioned banking terms and conditions, case law is full of examples where a court has prevented a bank from doing so. Click here for an example.
4. Obtaining alternative funding from a different bank, private investors or via crowd funding
We are the first to admit that finding a different provider of new loan capital is not a simple matter. After all, you require a new credit arrangement because your company is not doing well. That is obviously not the best time for other providers of loan capital to step in. Even so, this procedure is by no means doomed to failure at the outset and we often see that entrepreneurs succeed in transferring loans to other parties. Even in this difficult period. Your current bank’s duty of care means that it must give you the opportunity of looking for alternative providers of credit and arranging a loan.
5. Bankruptcy (and relaunch?)
A transfer to Special Assets may unfortunately result in a petition for bankruptcy, or we may advise you to start insolvency proceedings yourself. Going bankrupt is of course always stressful, however, with the right coordination and guidance, a bankruptcy can also open up new opportunities. The newspapers often feature articles on management relaunches after a company has been declared bankrupt. You can relaunch the company with a suitable business plan if you are able to buy back the assets from the receiver. So if a transfer to Special Assets does not lead to a revitalised and healthy business, this procedure may result in a rebirth of your business in an updated form. Obviously, the inevitable snags and issues mean that you require good advice regarding your rights and obligations and the risks and opportunities associated with relaunching a company.
Interest rate swaps
Finally, this topic is worthy of consideration. In practice, we see that banks struggle with complex products which they have offered in the past and which can have a negative effect on the credit relationship with their customers. For example, swap products such as the interest rate swap, which has attracted a great deal of media attention due to the negative value and the high lump-sum payments. If you have entered into contracts with your bank for financial products of this nature, analysing them critically (or having others do so) will be worth your while.
Conclusion: time for action!
A transfer to Special Assets does not mean that the situation is irrecoverable. But it is two minutes to midnight. However, if you do not act immediately and decisively, it may be too late. Regardless of your choice of option, good guidance is of great importance. You need to stand up for yourself at the right time and document all the agreements made on paper. While you must to give the bank correct information and comply with the agreements, you do not have to follow the bank’s instructions at all costs. The assistance of an experienced lawyer during this procedure is essential. Obviously, we can assist you and provide guidance during a procedure of this nature. You are welcome to arrange a free consultation meeting with our specialists so that we can explain exactly what we can do for you.
Contact Special Assets Desk:
T. +31 (0) 88 141 08 16
T. +31 (0) 88 141 08 05
T. +31 (0) 88 141 08 16