January 10, 2013
Q: Does the 10/30/2009 Regulators' Policy Statement remains valid, or is there an updated Statement.
A: To our knowledge, the latest Regulators’ Policy Statement on Prudent Commercial Loan Workouts is dated October 30, 2009.
However, it is our understanding that the Federal Register for the National Credit Union Administration has published Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans dated May 31, 2012. If history is any guide, nothing in this document contradicts or refutes the analytical process reinforced in the October 30, 2009 Regulators’ Policy Statement.
Q: Is there any general guide on how guarantor's cash flow and net worth are a link to possible upgrade of rating (i.e. one notch upgrade?)
A: The determination of the value of a personal guaranty in the process of upgrading a credit would be determined on a case-by-case basis.
Among the determining factors would be the amount of personal liquidity as it relates to the amount of any loans guaranteed as well as a clear understanding of all additional contingent liabilities. In addition, the overall quality of the guarantor’s net worth must be determined, again in relationship to the total dollar amount of all guarantees.
Q: Regarding loans to owners when calculating cash flow, are existing loans with no repayment terms treated the same as new loans?
A: There are two issues to consider, both having to do with cash inflows and outflows.
The first consideration is the amount of any new loans to owners that are made in a given year which is determined by the change in loans to owners from one year to the next. These new loans represent cash outflows.
The second issue is to determine if any of the loans to owners (new or existing) will be paid in cash in the future. It would appear that a decline in loans to owners would represent a cash inflow to the company. However, in that case, we must check with the borrower and/or the accountant to determine if the transaction was a cash event or simply a conversion of the owner loan to a distribution which would not be a cash event in that year.
Q: Regarding Schumacher’s 2007 Personal Cash Revenue table on Slide 29, where are the relating (1-5) references located. I am not seeing them on the bottom of the page or surrounding pages.
A: In the download material we included three documents regarding Frederick Schumacher:
- Personal Financial Statement dated December 31, 2007.
- Individual Federal Income Tax Return for 2007.
- Personal Cash Flow calculations for Frederick Schumacher.
The footnotes to which you refer are located in the Personal Cash Flow calculations.
Q: Would you consider the possibility that distributions came from existing cash (sales of assets or retained earnings from previous years) rather than coming from cash flow?
A:The important point to keep in mind is not necessarily the source of the cash outflow for distributions, whether from past or present cash flows, but rather how the total amount of distributions effect the overall credit quality of the company. After distributions, does the company have sufficient cash flow to service scheduled debt from operations and are all financial ratios and profit margins acceptable to the lender?
Q: Is there a percentage on personal liquidity that will be considered acceptable for the loan?
A: There is no guideline for the percentage of liquidity that should be maintained by a guarantor. This should be determined on a case-by-case basis.
Among the determining factors would be the amount of personal liquidity as it relates to the amount of any loans guaranteed as well as a clear understanding of all additional contingent liabilities. In addition, the overall quality of the guarantor’s net worth must be determined, again in relationship to the total dollar amount of all guarantees.