The “Special Assets” is the name for a department within a bank or lender that manages companies or clients at greater risk of defaulting on their loan(s). The team within the special assets department typically works with the company to determine if the company’s financial performance can be improved or if the account needs to be moved to the workout department. When an account is moved into the workout department, the lender often wants to be paid off.
How does an account end up in Special Assets?
One of the primary reasons an account is classified as a special asset is that it has missed payments on a loan. But this is only one reason an account gets flagged as a special asset.
Most banks have specific covenants within the loan agreement that require the borrower’s compliance. When the borrower breaches these covenants, the bank will often assign the account to its special assets or workout department. The goal of the special assets department is to help counsel the client to bring them back into compliance with the covenants. The goal of the workout department often is to try and get paid off, however possible, including by having the customer refinance the debt.
Types Of Bank Covenants
Covenants can be affirmative, negative, or numerical/financial in nature.
Affirmative covenants basically state that the company will do something, and can include:- - Paying taxes
- - Adhering to certain accounting principles
- - Maintaining insurance
- - Providing financial statements
Negative, or restrictive, covenants state that a company will not do certain things and can include the following:
- - Restriction against issuing dividends or distributions
- - Restricting the sales of assets
- - Disallowing the company to take on additional debt
Numerical or financial covenants state that a company will maintain or exceed certain financial targets or ratios and can include:
- - Debt service coverage ratio
- - Working capital ratio
- - Debt-to-Equity ratio
- - Current ratio
Specific covenants are typically found in the loan agreement. Banks almost always include covenants in their loans, but some other lenders do not.
What Should You Do If You End Up In Special Assets?
Cooperate With The Bank
The bank places an account in special assets to protect itself. The bank's primary concern is its own bottom line, and the special asset department's primary goal is to minimize losses for the bank.
The bank will most likely increase reporting requirements and request more detailed information more frequently. When the bank’s account manager requests information, be honest, direct, and as compliant as possible with answers to the requests.
In some cases, the bank may be interested in having your loan(s) paid off, but they want to maintain the checking and savings deposit accounts. This is something you will want to discuss with your special asset manager.
Understand That Costs Will Increase
As the bank puts pressure on you to comply with the loan terms, fees and interest rates will most likely increase. Even if you make it through the workout process, your future borrowing costs will most likely be higher. This can create a situation where your financial condition deteriorates and you fall further behind. How do you break the cycle?
Look For Alternative Financing
Alternative financing can include finding another lender to refinance your existing loan(s) to pay off the bank. If the new loan originates with a non-bank lender, you may not have to deal with covenants.
Improve Your Cash Position
To help reduce expenses, and collect from slow-paying accounts, or those with past-due invoices, consider accounts receivable financing, including invoice factoring, to get paid faster on every invoice issued.
Accounts receivable financing, as noted above, can be a key to improved cash flow.
If you have revenue-generating equipment, especially heavy equipment, you may be able to refinance some of it to obtain a working capital loan to help pay off the bank.
As you search for alternative financing, be aware of merchant cash advances (MCAs) that are often disguised as working capital loans. MCAs can provide you with quick cash, but they are very expensive and will introduce new challenges to cash flow and future creditworthiness.
Engage Assistance
Navigating the banking world can be daunting, especially if your account has been moved to the workout phase. Consult an attorney and consider hiring an experienced, outside financial advisor.
Engaging an experienced financial advisor or turnaround specialist can enable your internal management team to continue focusing on running the business while the advisor handles restructuring the debt. This can also help instill confidence at the bank. The advisor can actively engage in seeking alternative financing and help provide the requested reporting and information demanded by the bank.
Regardless of how your account ended up in the special assets department, it doesn't necessarily mean you have no alternatives. It might mean the end of that particular banking relationship, but if you work within the system, you could end up with a healthier bottom line in the future.
