There is a famous scene in the movie A Few Good Men where Jack Nicholson tells Tom Cruise that he “can’t handle the truth”. This conversation is starting to and will continue to take place between bank management and special assets groups around the country in banks both big and small. What is the truth? The truth is that the bank executives rarely want to know or understand the tactics involved in exiting clients – client-first on the way in, client-last on the way out. We all see the horizon, which is that once the stimulus monies run dry and the government takes its eye off the banks then the banks will be left with a massive portfolio and reserve problem. What Jack Nicholson meant by Tom Cruise not being able to handle the truth is the reality of what it takes to protect the country or in this case the banks’ capital at all costs. This falls on the men and women who comprise these special assets groups as a heavy task is being put on their shoulders.
The national and regional banks have staffed up like no tomorrow and fortuitously used the reprieve of PPP to be ready when the proverbial damn breaks. In a matter of 6 months most special assets groups effectively went from being depleted from cost cuts to fully staffed, but with a lot of newly minted folks on board. The ask on these professionals is daunting and the rules placed on them are harder this time around. The banks are not going to have a choice, but to give a lot more leeway to the folks on the ground given the billions of dollars at stake and the rush to reduce risk. Just as important as risk is the importance of freeing up reserves to increase capital bases. In fairness to senior bank executives, it’s hard to worry the “how” will be it done vs. “when” will it be done. This gets us back to the “truth” is how it gets done and businesses are going to feel the burden of banks applying significant stress.
It’s Code Red time in special assets and the leaders of these groups are shadowing hundreds of clients for when the PPP runs out. The new conversation is that Q3 ‘21 is the new Q4 ‘20 as aside from direct-hit industries ie retail and restaurants most companies have conserved cash to mitigate accounting losses. This trend is going to reverse at some point as vendors will need to be paid and working capital funded for most businesses to resume. Banks are not going to be the equity for most mainstream businesses and the hard work of clearing out non-accrual loans falls to special assets. Their orders are going to be clear, which is to create liquidity and do so quickly. Do the senior credit folks ask or want to know the tricks of the trade or methods used? More often than not they don’t.
What is about to happen should be studied as a case review. There is no playbook for staffing an entire division during a pandemic that will be underprepared and overworked for what is going to be tasked of them. Banks don’t have a choice, but to free up capital and companies won’t have a choice. On top of this, add a number of newly minted professionals to this mix and it is going to be a wild ride. Just the recruiting part in and of itself is a challenge as one needs a certain personality type to exit clients. One special assets executive suggested that interested applicants take a personality test to gain entrance as its hard and unrewarding work. The Code Red order is out ie exit clients and special assets executives need to know they have folks who can do the job. They also need to know folks who can take them out of their tougher credits. This is where the partnership with the non-banks comes into play, especially the ABLs.
Non-bank ABLs and distressed lenders are watching and waiting. It’s a tricky partnership between the two groups and one that is highly inter-dependent. Each group strongly relies on the other. What’s also worth mentioning is that the field of special assets is arguably the most fragmented field in all of finance. It’s by and large a regional endeavor and each group for the most part is on their own to find take-out partners. This topic alone merits discussion, but this dichotomy is also why there are so many inefficiencies in the market. Banks expect regional groups to solve regional problems with regional solutions. They expect billions of dollars to be moved out efficiently all the while not realizing each group has very different and not equal groups of take-out partners. Unclear whether the senior bank executives realize the charge being given to these professionals, but they need these folks on the proverbial line. As Jack Nicholson said, “you want the truth, you can’t handle the truth.” The truth is coming to a theater near you in Q3 ‘2021.
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