Independent Business Review: What the Bank Asks For

The triggers are familiar: a covenant breach, missed payments, a run of losses, a forecast the bank does not believe, or a request for more money from a business already in difficulty. The bank could ask its own analysts to look, and for small exposures it often does. For larger ones it wants a view from outside, for three reasons. An accountant with restructuring experience can test the forecasts and options more deeply than a credit team can from the papers. A report addressed to the bank gives its credit committee, and any other lenders in a club or syndicate, one set of facts to decide on. And it records that the decision, whatever it is, was taken on evidence.

The cost usually falls on the borrower. Facility documents commonly let the lender recover the costs of investigating a default or a request for waiver, and the review is engaged on that basis. A borrower can often negotiate the scope and the fee estimate, and sometimes the choice of firm from the bank's panel, but rarely whether a review happens if it wants the bank's continued support.

The terms of reference set the questions, and they decide what the bank learns. A full review usually covers the short-term cash position, often through a 13-week cash flow forecast the reviewer builds or tests; the trading record and why it went wrong; the forecasts and the assumptions behind them; management's capacity to carry out a recovery; the pressure from other creditors, such as tax arrears or suppliers on stop; the options, from new equity and asset sales to a formal insolvency process; and an estimated outcome statement showing what each creditor would receive if the business were sold as a going concern or broken up.

A narrower review, on cash alone or on one problem contract, costs less and is quicker, and a bank may start there and widen the scope if the first findings warrant it. The engagement letter is commonly signed by the bank, the reviewer and the company. The reviewer's duty runs to the bank, the company gives access to its records and people, and many letters let the company comment on a draft for factual accuracy before the final report goes to the bank.

A precast concrete manufacturer, constructed for this page like every figure in it, owes its bank US$14m: a term loan secured on its yard and plant and an overdraft. It has breached its leverage covenant and asks for its overdraft limit to rise by US$1.5m for six months. The bank asks for a review covering cash, forecasts, options and estimated outcome, with a fee estimate of US$85,000 that the company will pay. Six weeks later the report comes back. Figures are in US$m and belong to the example.

Three findings change the file. The cash need is US$1.9m, not US$1.5m, because a tax arrangement falls due in week seven and a large retention payment will be released later than management assumed. Two of the three product lines are profitable; architectural panels lose about US$1.2m a year. And on the estimated outcome, enforcement today would cost the bank about US$7.1m on a break-up, against a shortfall nearer US$2.1m even if the business had to be sold as a going concern.

The bank agrees to support, on conditions the report makes possible: an overdraft increase of US$1.9m under a standstill, closure of the panels line, US$0.5m of new money from the shareholders, weekly cash reporting against the reviewer's forecast, and a sale of surplus land within twelve months. The understated request matters as much as the numbers. A management team that forecast its own peak need US$0.4m too low will now be measured against someone else's forecast.

An audit gives an opinion on whether past accounts present a true and fair view, for the shareholders, under auditing standards. A review looks forward, for the lender, and gives no audit opinion. It may rely on unaudited management accounts and it tests forecasts no auditor would sign. A borrower that has a clean audit report can still receive a review saying the business cannot service its debt.

The review is also distinct from the appointment that may follow it. In Australia, the industry's Banking Code of Practice requires banks to act fairly when they use investigating accountants for small business customers, to manage the conflict when a bank appoints as receiver an accountant who carried out the investigation, with extra internal oversight of that decision, and to consider another practitioner if the relationship has become unworkable. Elsewhere, the bank's own policies and the profession's ethical rules govern that step.

DEFINED IN ONE PARAGRAPH → · WHEN YOUR LOAN GOES TO WORKOUT → · THE 13-WEEK CASH FLOW →

The review shapes the negotiation before it starts. Whoever writes the terms of reference decides which questions are asked, so a borrower who reads them closely, asks for its own options to be considered and engages its own adviser early is better placed than one who waits for the report. Once the report lands, its estimated outcome statement becomes the reference point: the bank compares any proposal with what enforcement would return, and a plan that beats it has a case.

The report also becomes the baseline. Its forecast is what the business is measured against over the following months, and a borrower that hits it has evidence for a better conversation at the next review. One that misses it has given the bank the reason to move from support to recovery.

PROBLEM LOANS AND WORKOUT → · GOING CONCERN AND BANK SUPPORT →