Your Loan has Been Assigned to Special Assets...What Now?

You've been taken by surprise. Your banker, whom you have known and worked with for years, calls to inform you that your loan has been assigned to the Special Assets department. Your immediate questions are, “What is Special Assets?” and, more importantly, “What does this mean for my company?”

The Special Assets or “workout” department is where the bank manages credit risks that have been classified at or above a certain defined risk level that is deemed too high for the bank to handle in an ordinary fashion. The borrower may have missed payments or breached loan covenants, and/or appears likely to do so in the near future.

In short, your loan has been classified as distressed, and your lender has decided to bring in its specialists that know how to best exit a loan. Yes, that’s right—your bank has decided to end its relationship with you, whether or not it immediately gives you a deadline for doing so.

The bank’s workout specialists already understand all their options, including their rights in a bankruptcy proceeding under federal law, assignment for the benefit of creditors (ABC) under state law, and the rights and remedies they may have under the loan agreement. They know how to push the right buttons at the right time to maximize their recovery.

You can expect the tenor of your relationship with the bank to change completely. There will likely no longer be any interest in maintaining the customer relationship of the past; instead, the bank will have its eye on the exit door, and it’s just a question of how long it will take to get there.

In some cases, your former relationship manager may remain involved, but he or she will no longer be driving the relationship. Be aware that loans go to die in the Special Assets department, and rarely will a client in workout be returned to the performing loan portfolio manager, with your banker friend back in the driver’s seat.