Understand your counterparty risks
It is very important in the present climate to understand your contracts and your counterparty risks. We are finding an increasing number of clients “stress testing” their contracts and considering the consequence of an insolvency event. This is good practice; particularly since to identify weaknesses in structures and counterparty risk upon insolvency may afford you the time to fix it before things do go wrong.
Where are the documents?
Connected with understanding your contracts and your counterparty risk is knowing where the documents are! In good times the collection of original documents and the file of conditions precedent very quickly gets passed to the junior members of the team and it can be surprising just how much ‘uncertainty’ that can arise in the archive process. If your portfolio includes companies already in distress (or likely to be in the near future) it is advisable to recall the archived documents and ensure that you have all the right originals and registration certificates. You do not want to be in the position of missing crucial papers when the time comes to act quickly.
Record your decisions responsibly
You will invariably have notice of pending financial difficulty. Certain sectors (such as bulk shipping) may be facing significant difficulties irrespective of the quality of your borrower’s assets or management; some borrowers may ‘misplace’ or ‘forget’ to provide the regular management accounts or audited financials or other information typically required under your finance documents may be slow in arriving - these actions can set alarm bells ringing with more experienced bankers.
As the warning signs start to manifest themselves, correspondence between back office, credit, origination and internal restructuring teams will start. All of your teams need to be aware that at some time in the future those emails, which are internal correspondence, may need to be disclosed in proceedings (or in some jurisdictions under data protection laws). Your discussions should therefore be business like and in a manner and tone that avoids professional embarrassment. Make sure your team knows this.