Lenders increasing use of receivers to rein in delinquent loans

Chris Tierney is a busy man these days.

A managing director at Atlanta-based Hays Financial Consulting, Tierney works as a receiver, a go-to guy of sorts sought out by lenders to help them with problem loans on their books.

As banks continue to struggle with bad loans in their portfolios, they're increasingly looking to receivers, who are appointed by the courts and charged with taking over the day-to-day management of a business with an outstanding loan.

"The banks are looking at it and saying, ‘I need somebody to go in there and make something happen,'" Tierney told The Atlanta Journal-Constitution.

The thinking: Having a judge appoint an independent person to run a company with an outstanding debt could stave off putting the loan in default. Even if the receiver ultimately decides to sell the entity, lenders hope he or she will have fixed enough of the problems to fetch the highest price in a bad real estate economy.

But beyond that they're looking to preserve cash flow, said S. Gregory Hays, founder and managing principal at Hays Financial. For example, he said, a borrower who owns an office building or shopping center with rent-paying tenants has an income stream the lender wants to protect.

"The bank needs a true picture of the cash flow from the property or the asset," Hays said. "They need an independent person in there to get their hands on the complete picture."

Unlike business bankruptcies -- which the American Bankruptcy Institute said jumped to 60,837 filings in 2009 from 28,322 in 2007, a nearly 115 percent increase -- it's difficult to gauge just how much receivership has grown. That's because bankruptcies are handled by bankruptcy courts and are tracked separately. Receivership cases are heard by state court judges and are not as easy to track.

But receivers and bankruptcy attorneys say they've seen a sharp increase in the past year and they expect that trend to continue, particularly as scores of loans on commercial real estate properties, built or sold with short-term interest loans, are set to mature in the latter half of this year and on through 2014.

In a good market, the borrower could refinance or the lender could sell the loan, even if it had problems. Not now.

"They realize now there is no greater fool," Tierney said. "There is no white knight saying, ‘Hey, I love this kind of loan; give it to me.'"

Hays Financial says its receiver practice has grown from one per year just two years ago to about one new case a month  now.

GlassRatner Advisory & Capital Group, another Atlanta-based firm, says its volume of receiver cases is up more than 25 percent, with 75 active cases today.

Lenders shy away from public discussion of their use of receivership. SunTrust Banks and Wells Fargo, which acquired Wachovia in 2008, both say they haven't increased their use of the procedure.

But Frank W. DeBorde, chairman of the bankruptcy practice at Morris, Manning & Martin, said lenders are going the receiver route instead of foreclosing on loans because they want to secure the borrower's cash flow and they want to stabilize the operations of that borrower's business.

It's also cheaper, costing a lender roughly half what it would if the borrower went into bankruptcy, experts say.

There's another reason lenders want it: Receivers are court-appointed and report to the judge, not the bank, keeping direct ownership of the property -- and the responsibility for potential problems it may have -- off the lender.