Collateral Matters - A Banking Law Newsletter.
Mondaq Business Briefing › Nbr. 2009, January 2009
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Collateral Matters - A Banking Law Newsletter.
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Lending in Troubled Times Insurance Matters: Good News for Lenders From the Ontario Court of Appeal The CDS Contagion LENDING IN TROUBLED TIMES By Aaron Collins INTRODUCTION Likely the last thing you want to read is another article talking about how we are in the midst of a global recession. Such headlines are permeating the news day-in, day-out. However, putting aside the sting of twenty-four hour media hype about the depth of the financial crisis, there are definitely some practical considerations of which lenders should be aware in a down market, and some extra measures they can take to protect themselves. With this in mind, below is a broad overview of the warning signs that might show a borrower is in trouble, steps a lender should follow if a borrower has problems making payments, and information about insolvency and restructuring in general. WARNING SIGNS – WHAT TO WATCH FOR The first thing that lenders need to know is whether a borrower has started exhibiting any symptoms, or "warning signs," of problems in its business. It is impossible to create a definitive list of these warning signs, but there are several factors that tend to be common among borrowers experiencing financial trouble. These factors can be broken into two general categories – those at the market or industry level and those specific to the borrower. At the market level, it is important to consider worldwide economic forces and industry trends. We are seeing global demand for almost every product or service adjusted downward. If a borrower's product or service is no longer required (or required by substantially fewer people), this will undoubtedly put a strain on its financial position. However, beyond just decreases in demand, it is up to a lender to keep informed of things like industry trends, government intervention and new competition for a borrower. The best current example is the automotive industry. The 2009 projection for automobiles sold in North America is between 9 and 10 million units, down from 17 million units in 2008. Clearly, this fallout increases the chance that many manufacturers, as well as their suppliers and the ancillary service providers, are operating under an unrealistic business model. With an almost 50% decline in sales there is also likely to be a residual over-capacity in the industry. What's more, with the shift to "green" technology and planned government stimulus packages that focus on reshaping automotive produ...See the full content of this document
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