The Gift of Forbearance
Happy holidays! December is a month of giving. Families exchange gifts, neighbors and friends give time and service to others, and many donate money to charitable causes. It’s a great time of year!
Another gift will be given to thousands of commercial borrowers by their lenders this year: a gift of forbearance.
The Covid-19 pandemic has had a profound effect on commercial borrowers and lenders over the past 18 months. While foreclosure moratoria, government stimulus, and eased banking regulations have relaxed pressure on struggling borrowers, these programs will soon expire. More and more lenders and borrowers will need to look at traditional ways to resolve troubled debts.
When a borrower defaults on a loan, the lender has the right to pursue its remedies under the loan agreements. It’s typical for these remedies to include accelerating the loan, making a demand for immediate payment in full, foreclosing on its collateral, moving a court to appoint a receiver, and/or various other actions.
With a forbearance agreement, the lender agrees to temporarily pause taking action to pursue its remedies. This pause usually gives the borrower time to put together a plan to recover and to take other actions the lender requires. Although lenders almost always say their terms of forbearance are standard
and non-negotiable, for commercial borrowers that’s rarely true. Forbearance agreements are usually hand-drafted for each situation. It’s a delicate negotiated process.
How does a Forbearance Agreement Work?
In distressed situations, borrowers almost always break the lender’s cardinal rules by asking for:
- more time;
- more money; and/or
- the lender to assume more risk
A forbearance agreement memorializes the terms a lender might be willing to give such. However, borrowers should not expect these requests to come without a price. It is common for a lender to require
the borrower to pledge additional collateral, sign personal guarantees, agree to a higher rate of interest, provide additional reports, waive claims, hire professional advisors like a Chief Restructuring Officer (“CRO”), and/or stipulate to swift remedies in the event of default. A big price, for sure, but agreeing to
these terms just might save the business.
Commercial borrowers should never negotiate a forbearance agreement without the help of qualified counsel and in some cases a turnaround professional. These professionals help borrowers avoid pitfalls,
negotiate terms that are in the borrower’s best interests, and add credibility to the borrower’s requests. Lenders welcome these professionals.
Further, it is important the borrower negotiates the terms carefully because it is likely to be the only chance it will get. Rarely does a borrower get a second or third chance. The future of the borrower’s business largely depends on the terms of forbearance it negotiates.
If you or your client is in default with a lender, call Amplēo for help. Its team of turnaround professionals have helped dozens of borrowers (and lenders) negotiate forbearance agreements. They also help borrowers execute on the terms of forbearance as a CRO and workout advisor. Let Amplēo help ensure the gift of forbearance provides the keys needed to effect positive change in the business.