Where Have All The Workout Bankers Gone?

Workout bankers haven’t been this hot of a commodity since the downturn of the early 90s. During the recent lending boom, loan workout departments at institutional lending houses (often called special situation groups) didn’t get much action. Their jobs involved renegotiating loans taken out by companies that were non-compliant, close to default, or in default.

With the bankruptcy rate wavering below 1 percent in recent years, a workout banker’s services were rarely called upon. “They were on vacation for five or six years,” one lender said. Many of the field’s experienced professionals moved on, winding up at buyout shops, investment banking departments, or loan origination.

“Entire lending institutions got rid of their workout groups,” said Lorie Beers, managing director with the Special Situations Advisory Group at KPMG Corporate Finance.

But with a recession taking hold, bankruptcy rates are up: 2008 could see a five percent default rate, based on an annualized first quarter. As of the start of May, 15 companies defaulted on their loans. Institutional lenders seeking to renegotiate sour loans have noticed holes in their staff. Filling that personnel void is a slew of fresh faces new to downturns. Even those working out the bankruptcies of 2002 and 2003 saw fewer cases of systemic business failure, Beers said. The major cases in that cycle were industry-specific, or related to fraud, she said.
According to several industry veterans, the lack of expert special situation lenders means two things for deals-gone-awry. For one, workouts are more complicated. Second, they take longer than they should. “There’s not a lot of institutional memory on how to deal with these types of transactions,” Beers said.

The learning curve for negotiating a distressed loan is steep. New faces at institutional lenders, and the hedge funds that bought the syndicated loans, approach workout negotiations as though they’re bargaining for new loans, the industry veterans said. “Its hard to have a logical conversation about things like rates and terms and covenants with a company’s that’s on the verge of a liquidity crisis,” one industry veteran said.

Fund managers without experience in distressed companies miss red flags, one banker added. Companies in decline often see the wheels fall off in a non-linear fashion, and without the right skill set, a lender won’t know its raining till its pouring, the banker said.

And that affects the timeline—a seasoned workout banker knows that when a company is in trouble, there’s no time to waste. Investment banker Rocky Pontikes of Mesirow Financial Inc. said his firm noticed a slower-than-usual pace on a number of recent transactions. “Loans are staying with the relationship bankers longer than they historically have, when they should be going to the special situations groups,” he said. The difference—relationship bankers tend to delay a sale, hoping the company will pull through. “The special situation guys are unemotional about the banks position,” he said, leading to a deal happening sooner.