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Extend, Amend and Pretend

June 8, 2010

"Extend, Amend and Pretend" was the overarching theme at the recent Turnaround Management Association symposium. In short, this is what banks are doing with their troubled credits. Extend the loan, Amend the trip-wires to foreclosure and Pretend that this is a good idea.

And really, who wants to face up to their issues? Apparently, not many banks in this economy. The stunning contradiction of the Great Recession is the low amount of corporate bankruptcies. I know it might not feel like that but think back to the last large retailer to go under? There was a flurry of bankruptcies going into the Christmas 2008 season (Circuit City, Sharper Image, etc) but very few since then. Several reasons include the low odds of reemergence from a Chapter 11 filing, lack of available financing and new bankruptcy laws.

Through 2009 banks were handing out 6 month forbearance agreements for troubled credits. "We can't afford to classify you as a bad loan so, go away, solve your problems and try to survive". 2010 has brought us rolling shorter-duration agreements but they are still not facing up to their issues.

Here's the problem; a lot of companies need help. The economy needs vibrant small businesses that are healthy and thinking about the future. Rolling 60 day forbearance agreements give no one the confidence to invest in their business. Debt restructuring would. Longer forbearance periods might.

The other problem is that this simply does not work. We now know that 75% of loans in the Extend and Amend cycle do not survive. They are slowly sucked dry then quietly liquidated and dissolved. No bankruptcy filing.

Here's the point; too many CEO's wait for their bank to force change. And they're relieved when it doesn't happen. But the underlying illness remains and can only be fixed through intervention and leadership. The time for debt restructuring is coming but companies must shore up their operations in preparation.
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Jeff Sands is a Director with Dorset Partners LLC (www.DorsetPartners.com) which helps companies Revitalize in the face of serious economic challenges. Dorset Partners has recently published its Business Health Test which is a diagnostic that several CEOs have used to spot trouble early and make changes to avoid serious problems. The Business Health Test is available as a free download on their website.