BY THEODORE H. SPRINK
Frozen credit markets, residential foreclosures, government bailouts of the private sector, Fed Funds rates not
seen since the 1930s, the questioning of the SEC and the rating agencies, stock market setbacks, unstable energy prices, interest rates, cap rates, the fear of inflation, deflation, stagflation, recession, depression, increases in
business bankruptcy filings, higher unemployment rates, reduced orders for manufactured goods and slipping
consumer confidence: these are just some of the issues that suggest commercial-loan default rates may play a
more significant role in bank strategies than they have in the past.
In recent years the stable economy
has “masked” commercial-loan defects,
not linking them directly to defaults,
loss-given-default and loan recoveries.
Documentation defects that will directly
affect value and recoverability of collateral have been kept somewhat below
the surface because many of the affected loans are not yet in monetary default.
And, in the past, a good loan work-out
effort, coupled with alternative sources
of capital, could move a defaulted borrower out of the bank. No more.
The existence of technical defaults,
repeatedly renewed “PIK” loans, and
a swelling emergence of monetary
defaults suggest a strong likelihood that
many borrowers are headed toward
insolvency proceedings. This potential is
increasing dramatically each month and
is likely to result in frequent challenges
to commercial lenders’ security interests
as competing parties focus on collateral
in order to maximize their recoveries.
Today’s Business of Banking: Little
Room for Error
Perceived equity cushions, a stable
economic environment and plentiful
alternative sources of capital have for
years artificially hidden problems associated with collateral value, borrower
cash flow and management difficulties.
Loan concentration, relaxed underwriting standards, declining asset values
and increasing defaults in core lending
