Juvenal, the Roman poet, probably did not have asset-based lenders, commercial trade finance companies or factors on his mind when he coined this particular phrase, “Who guards the guards?” And perhaps I am taking too much poetic license as I utilize this phrase to illustrate the sets of circumstances typically in place when external review or intervention of some kind is called for in respect of these types of organizations.

In an industry where the players are very adept at encouraging their clients or borrowers to avail themselves of the services provided by consultants, advisors and turnaround management teams, there is less known about the type of support lenders sometimes require in respect of their own operations. There is good reason for this -- lenders are extremely concerned with confidentiality and the decision to engage external help is not easily arrived upon.

In this article, I will describe two separate situations and answer the question: “Who guards the guards?”

The first and most obvious circumstance is where a lender’s credit line provider wishes to continue to monitor the performance of the lender’s portfolio and operation, and sets up regular lender finance reviews – which are sometimes referred to as “Back to Back Audits.” These Back to Back Audits operate in the same way lenders conduct routine field examinations of individual borrowers. This process involves an independent review of the conditions and circumstances of the lender and the collateral securing a transaction.

This audit process is challenging work and requires different approaches subject to the varied types of asset classes, credit appetite, portfolio size and dynamics of a particular lender. Furthermore, the level of sophistication of systems processes and operational controls vary widely across lending businesses.

The questions these types of reviews attempt to answer include, but are not limited to:

• Is the lender conforming to its own policy and rules?
• And more importantly: Has the lender adhered to the specific covenants or restrictions agreed upon with the credit line provider when the facility was established or in respect of subsequent agreements?

There is of course a review and analysis of portfolio composition, spreads, concentration, performance and volume. This analysis leads the examiner to ask:

• Are risk management protocols commensurate with portfolio risk and robust enough to protect the credit line provider?
• Are non-performing loans being recognized and managed within acceptable parameters?

Just like a standard asset-based loan examination reviewing a borrower, the lender review will also examine technical and human resource capacity and capabilities as well as the lender’s ability to manage operations and report financial performance accurately.

A very important question and one that is consistently overlooked is if the credit facility been utilized to finance collateral, as opposed to being utilized to maintain lender operations. It’s not difficult to imagine the reaction of a credit line provider when the latter is the case because this can lead to the second type of service – moving from reporting to reacting.

So what happens when the challenge, threat, or opportunity lies much closer to home (i.e. within the finance organization itself)? And what are these circumstances that could possibly need intervention from an outside consultant? Well, they are wide and varied.

Such situations include the need to develop policies and rules in response to changing market conditions. There are also technical reasons for such reviews such as systems and process reviews to evaluate efficiencies and robustness of existing routines, and advising on improvements. This can involve the identification and sourcing of appropriate software services and IT infrastructure.

At one end of the scale you have organizations where existing offerings and positioning is not in alignment with current market opportunities; at the other end you have situations where the finance company has been damaged by portfolio events – the most pervasive of these events is fraud. In all circumstances these are time critical situations and usually there is a financial or trading cost that needs to be resolved.

Who Calls the Play?
The recognition of the challenge sometimes emanates from or is instigated by local management. There are other occasions when local management will resist utilizing external resources -- this is usually a very good reason why it needs to happen. The call is usually from senior executives, parent banks or credit line providers.

Who you Gonna Call?
The answer to this question is not as easy as you would think because the problem – as often described to us – is that the lender does want to spend several weeks training people in what they do in the expectation that the consultant will somehow be able to identify the lender’s challenges and develop a solution. The finance providers as described herein consider themselves specialists and the challenges they face require an inherent knowledge of the market, positioning within industry sectors, facility types, portfolio dynamics, operating conditions and protocols. A general consultative approach will just not do.

Of course the most sensitive situations are where collateral and/or financial damage has occurred … this is the most common reason for the call.

This requires a two pronged approach, and whilst a hindsight review is conducted to identify the exact reasons for the impairments, the identification of other potential circumstances and the ring fencing of these situations are also called for.

The problem is usually found in poor controls, borrower quality, procedures and people. The most challenging of these problems concerns people and the difficult question is whether these problems are the result of incompetence or something more sinister.

Over the years we have dealt with many of these situations and been involved in supporting lenders through challenging circumstances. These projects have included the introduction of new policies and procedures, as well as improvement and development of audit techniques and templates. We have developed and trained staff and provided interim portfolio management, and have worked on specific recalcitrant borrower situations.

The power of this work is that we do not have the inconvenience of being involved with the past and we have no vested interest in protecting legacy systems, procedures, borrowers or staff. As stated earlier, this is challenging work by somebody has to do it.