A South Florida SFNet chapter event on September 17, “Winter is Coming: How to Prepare for a Cooling Economy,” was an in-depth panel presentation moderated by Chris Gouskos from Gibraltar Business Capital. The panelists shared practical ways lenders can protect their institutions and their clients as economic uncertainty builds. Together, they examined how deals are originated, managed, and, when necessary, restructured. 

"It has been since the Great Recession that we have had a real economic cycle,” began Gouskos as he framed the issue. “In response to the COVID epidemic, the government pumped so much money into the system that most companies and the economy at large avoided significant economic impacts. There were unintended consequences, supply chain issues and inflation to contend with, but the economy kept rolling along. Now we have tariffs that go up and down and a lot of uncertainty around their implementation and effect. The impact on company financial performance and collateral valuation remains uncertain, leaving business owners, management teams and lenders in a somewhat tenuous position. It’s critically important to make sure as senior lenders that we are proactive from an underwriting, portfolio management, collateral management and reporting perspective.”

In addition to Gouskos, the panel included Mark Smith, head of underwriting for Regions Business Capital; David Montiel, who oversees White Oak Commercial Finance’s special assets; Stan Grabish with GA Group’s field exam team; Joe Massaroni, representing Gordon Brothers’ Appraisal Group; and Mike Litwack, who is a turnaround professional with Richter Consulting. Panelists explored five main areas: structuring new deals, portfolio management, spotting early warning signs, and acting when trouble surfaces and general economic conditions and potential tariff impacts on profitability and collateral values.

Structuring New Deals
The conversation began with what makes the most sense to do in this environment from a new business perspective. Investment committees will be tighter on credit when the economy contracts and will have many more questions, but all agreed that in uncertain times, lending must continue. 

Smith began by stating, “I start every diligence process with understanding how I can get our institutions’ and stakeholders’ money back. I can promise you in my shop we’re getting a lot tougher questions from our credit officers and we’re asking tougher questions of our clients. So, I would say the first thing to do is really heighten your diligence. We understand we’ve got to work with clients and we’re not there to offend them or accuse them. But dig down. Be careful not to accept superficial answers that you can’t somehow support. So ask why, why, why and really search for the answer.”

The second point made by the panel is to make sure to thoroughly read the collateral appraisals thoroughly and slowly. It’s very important to understand and agree with critical assumptions. Don’t just look at the NOLV page. Make sure to analyze it. They’re a tool, not a guarantee. 

Lastly, existing in a world of springing cash dominion, springing covenants and other “big deal” terms that have matriculated in the middle and lower middle market, make sure to have ways to protect your position if performance deteriorates. Ensure triggers are set at levels that trip while there is adequate liquidity and room to maneuver. Also make sure to never give up the ability to establish reserves, even if they are slightly diluted with “commercially reasonable” language. The sooner you can get a weak borrower to the table, the better off you will be. 

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