Lender Fatigue Revisited

image of a banker that is tired of you

My last blog post was about Lender Fatigue. An acquaintance who read the blog reached out and asked me how common Lender Fatigue really is.

Lender Fatigue is very common. If you don’t believe me, ask your banker about the last time the bank experienced Lender Fatigue with a client. Your banker will know exactly what is meant by the term.

Not only is Lender Fatigue common, it can bring about irrational behavior on the part of the bank. When someone is fed up and has reached his limit, he is often not going to think clearly.

For a case in point – read this true story of Lender Fatigue that I witnessed…

The company had some previous ups and downs and their balance sheet had eroded. They went into a short, sharp crisis in the first half of the year and lost quite a bit of money. The bank rescued the company by transferring debt from the line of credit into a refinancing of the building. The company recovered in the second half of the year. They didn’t lose money in the last two quarters, but they didn’t make much, either. As such, they ended the year showing the same loss that they had in the first half. The company did return to positive cash flow and the line of credit continued to be in good shape (plenty of “room”).

The bank was aware of the progress. In the first quarter of the new year, the company showed a modest profit. The bank received the previous year’s audited financials (showing the loss the bank was already aware of). The bank put the company into “Workout” early in the second quarter (in Workout, the bank “calls” the loan). Because of the loss shown on the previous year’s audited financials, the company could not attract another bank. At the end of the second quarter, the company completed a string of four consecutive profitable (albeit, not by much) quarters.  At that point, the bank foreclosed on the company and sold the assets to pay the debt. The company thad never missed a loan payment (nor was it likely to in the foreseeable future). It had positive cash flow and the business was continuing to improve. Collateral value was 2.35 x debt – so the bank had very little risk in letting the business continue to operate.

That’s right. The bank closed the company after it recovered from its loss, had strong collateral, positive cash flow and had just completed four quarters of profitability. That’s Lender Fatigue. The bank was fed up about the previous year (and the up & down cycles prior to that). The bank made up its mind regardless of the current facts. Lots of people lost jobs and wealth was destroyed. The bank was rewarded by collecting 100% of the outstanding debt. The government took the rest to plug a gap in pension funding. Unsecured creditors took a bath. Ownership wound up with nothing.

This didn’t have to happen. The company could have refinanced with another bank after the close of the current year – after receiving an improved set of audited financials.

The moral of the story: borrowers who have had several up and down cycles in the last few years absolutely need to understand Lender Fatigue.