Workout Your Workouts Make Trimming the Fat Part of Your Bank’s New Year’s Resolution By Michael R. Proctor, Special Counsel, Bowles Rice LLP With the new year upon us, now is the time to choose our favorite resolutions for a positive start to 2025. For banks, this process might include a comprehensive special asset plan. An increase in interest rates over the last few years has caused variable rate loans to adjust upward. Higher rates have also made it more difficult for borrowers to refinance. At the same time, inflation and supply chain issues have led to disruptions in some businesses. The combination of these factors seems to have caused an increase in defaults and special asset referrals over the last year or two. Banks should be prepared for the possibility that defaults will continue to increase in 2025. A special asset increase has been predicted for the last five years, ever since the COVID-19 pandemic. Some feared there would be a repeat of the 2008 mortgage crisis. The flood never happened. In large part, the Paycheck Protection Program, Emergency Rental Assistance Program, student loan grace periods and internal flexibility of banks provided enough breathing space for business and consumer borrowers to prevent a large-scale downturn. Separately, some lenders made the decision to “extend and pretend” to maintain the status quo. This is not to say that all borrowers were saved, but thankfully, history did not repeat itself. With the end of these programs, the increase in interest rates and questions facing the economy generally, there is potential that the next special asset and restructuring chapter may be starting. In the bankruptcy world, the Small Business Reorganization Act (SBRA) has become an extremely popular option for small businesses entering Chapter 11. This option became available in 2020 and quickly gained popularity because it offered a streamlined and less expensive process than a traditional Chapter 11 reorganization. Since SBRA’s passage, the debt limit temporarily increased from $2.7 million to $7.5 million, allowing a greater number of businesses to qualify for this process. However, the higher debt limit included a sunset provision, which ended in June 2024, again preventing larger businesses from using SBRA. There is significant support for restoring the higher debt level, and it is possible that this will happen in 2025. Restoring the cap may assist some small- to mid-sized distressed businesses in restructuring and addressing loan obligations. Bankruptcies offer certainty and can be effective ways for borrowers to shed certain obligations while refocusing on their operational financing. But, in most circumstances a bank has little ability to force a bankruptcy. Without a bankruptcy filing where a borrower falls delinquent in payments, a collection plan is straight forward. But the situation where a borrower is 11 West Virginia Banker
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