1. Managing Troubled Assets Portfolio Management Series Webinar
Developed and delivered by

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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.
Grade each one of those. And add them together and divide them by # of categoreis. And th
CDFI Fund Capacity Building Initiative Managing Troubled Assets

8. 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

9. 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

10. Loan scrutiny should be dictated by the loan policy and driven by the risk grade.
CDFI Fund Capacity Building Initiative Managing Troubled Assets

11. Loan scrutiny should be dictated by the loan policy and driven by the risk grade.
Loan Size
Credit Grade 4 5 6 7
< $50m
F/S Requirements
Borrower submits semi annual or quarterly financials
Copy of Income Taxes, business and personal, within 180 days of FYE
Lender Review
Review Annually- Notes on F/S
Lender reviews tax returns, Notes on returns
Monthly update in PQR and Special Assets Committee
Risk Manager Review
Annual Risk Rating Review
Rating based solely upon receipt of tax returns and payment history
Additional
Upgrade, Work Out or Payoff Plan
Work Out, Payoff or Liquidation plan
Site Visits
none required
As Directed by Special Assets Committee
Customer Contact
Annually
Semi-annually
Based upon Upgrade, Work Out or Payoff plan
Based upon Work Out, Payoff or Liquidation plan
Other
Upon downgrade pull new Credit Report, lien search, double check closing documents
CDFI Fund Capacity Building Initiative Managing Troubled Assets

12. An action plan should be devised for each past due, watch list and problem loan.
CDFI Fund Capacity Building Initiative Managing Troubled Assets

13. Credit Status & Action Items Report
Company Name, Credit Status and Action Items
Action Items
Date
Preparer
Borrower:
Underlying Problem:
Strategy/ Action Items:
When will loan be moved out or upgraded?
Status Report:
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

14. 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

15. 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 Managing Troubled Assets

16. 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

17. 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

18. 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

19. 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:
For more information about the CDFI Fund’s Capacity Building Initiative, please visit:
CDFI Fund Capacity Building Initiative Managing Troubled Assets 19

20. 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 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, Jack Northrup at or Eric Hangen at If you have not taken the survey, please do so at the following link:
CDFI Fund Capacity Building Initiative Managing Troubled Assets 20

21. Managing Troubled Assets
Thanks for being with us today!
CDFI Fund Capacity Building Initiative Managing Troubled Assets 21