Type: Law Bulletins
Date: 05/20/2020

Distressed Companies Q & A

The number of changes and new information surrounding distressed companies can be overwhelming. The following provides helpful answers to questions we have received from our clients. 

What is “special assets” and why am I talking to a different banker?

Answer: If your loan is in default, whether for a covenant violation or an actual payment default, lenders often move you from the relationship banker that you have been dealing with for years over to a specialist in troubled loans. “Special assets” is probably the most popular description for that function. Depending on the circumstances, your lender may have had to take a reserve on its balance sheet against the prospect of a potential loss resulting from your company’s failure to repay everything it owes to the lender.

What is a forbearance agreement? 

Answer: A forbearance agreement is simply the acknowledgment by both lender and borrower that the borrower has defaulted on its loan in some way and that the parties are giving the borrower some time to fix the problems, likely with some conditions attached. The typical term for a forbearance agreement is 90 or 180 days, and the lender may impose additional conditions on its borrowers. These conditions include ceasing payments under any management; consulting or stock redemption/repurchase agreements; restricting dividends and distributions, either entirely or limiting them to only those sums needed for income tax payments; and requiring the company to hire outside experts. 

Why does the bank want a release from me; did it do something wrong?

Answer: No, it is a customary term. In virtually every such agreement, the borrower will be required to release any claims that it has against the lender as a condition of the forbearance agreement. For one thing, the loan agreements are drafted in favor of the lender, so it is extremely unlikely that you would ever have a claim against a commercial lender for how it administered the loan. This does not mean the lender thinks that it did anything wrong. Instead, it simply establishes that the past is prologue.

What is a “13-Week Cash Flow” and why should I care?

Answer: The 13-week cash flow model is the gold standard for examining the finances of a distressed company. As the name implies, instead of having revenues and expenses broken out on a monthly basis, as is typical of most budgets, the 13-week cash flow model is much more granular and provides a very accurate tool to use in measuring a company’s working capital needs. Moreover, it can also illustrate how subtle timing differences can have a material impact on cash needs. Finally, the 13-week cash flow is the lingua franca of the special assets world, so it is very likely that your lender will insist on a 13-week cash flow report as a condition of the forbearance agreement.

We will continue to provide any guidance on companies under distress. If you have additional questions, our Distressed Company Task Force can answer, please email

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