Interview Question re: Lender Due Diligence Process

Ray Velcoro's picture
Rank: Baboon | 152

Had this question asked in a case interview the other day and wanted to get your input on it:

So say you work at a bank and one of your portfolio companies approaches you regarding an extension on the maturity of their revolving credit facility as well as execution of a forbearance agreement. They operate in a distressed space like O&G.

As it stands today, they will not have sufficient liquidity to repay the balance of the revolver at maturity, and consequently, without an out-of-court agreement, you'll spend the next year dealing with the Ch. 11 / 7 rigmarole. Now, on one hand, you'd like to receive the full amount of borrowing on the revolver (w/o having to deal with a formal in-court RX process) so to a certain extent your inclined to extend the maturity for the company. However, what if you grant the extension and a year later the company is in a much worse position such that there is no other option but chapter 11 or 7 and your recoveries are much lower. It's not a clean cut decision and you need to be reasonably assured of certain outcomes to agree to the extension.

Walk me through your thought process on the types of question you're asking management, the major concerns you have, diligence framework, etc.