Don’t Just Know Your Client – Get the Whole Story

2017-07-18   minute read

Olivier Boyd

Debt Solutions

“KYC” – No, it’s not a new chicken restaurant — its stands for “Know your client,” a sacred mantra taught to every banker as he or she embarks on their banking career. Countless forms and documents are filled on a daily basis in its name. The reasons for this are fairly obvious, both in regards to client relationship management and for the sake of protecting the bank from money laundering businesses.

But we believe that there is another level of knowing your client, which is often overlooked and that is “know who your client is dealing with and how” or in other words, get the full story.

Everyone has a story or previous experience that comes to mind when facing a new problematic situation. With more than 65 offices strategically located in both urban and rural areas across the country and more Licensed Insolvency Trustees (LITs) across the country, MNP is able to help financial institutions address the challenges their clients are facing while also working to mitigate costs and losses on both sides. Let’s explore a few examples:

Case 1: The Environmental Issues

A young entrepreneur stumbles across a good deal to rent an old shoe factory with the objective of converting it into a prefabricated gazebo and garden shed shop. The entrepreneur approached the bank, which financed conversion costs and equipment and also provided a rotating line of credit for operations secured by the short-term assets.

After a few years of disappointing sales, the business fell behind on its payments and the bank was at risk of losing a signification portion of the money lent to the company. The Bank decided to take action and send an MNP consultant on site to assess and report to the bank on its security position with respect to the advances made to the company.

During a quick walkthrough of the premises with the owner, MNP’s corporate recovery professionals stumbled across numerous leaking, unmarked black barrels. The business owner explained that these half empty barrels were used to store old paint and varnish from the very beginning of the operations. He had long intended on getting rid of them, but had never got around to actually doing it.

As part of the KYC process, the fact that the company’s operations were located at a facility which entailed a potential environmental risk should have been taken into consideration and appropriate measures should have been implemented to ensure the proper management of these toxic elements, as they may have had a significant impact on the value of the Bank’s security.

As you can imagine, the financial impact of disposing of these barrels could have been considerable  a cost which could strongly reduce significantly the realization value of assets under security.

However, through careful planning, appropriate measures were taken to dispose of the toxic materials with the help of a specialized company at a reduced cost, thereby avoiding any potential negative environmental impact, which would have also had a potential financial and reputational impact on the bank.

With the help and support of the administrator, a liquidation proposal was then made to the creditors that allowed the bank to be entirely repaid and the unsecured creditors to recover much more than they would have in a bankruptcy scenario.

At MNP, we have the trained and experienced professionals necessary for identifying the various operational and financial risks associated to each type of business.

Case 2: The Construction Lien

A bank financed a commercial building for a single purpose activity in the outskirts of a major city. After a few years, the owner decided to renovate the building, with the aim of changing the use of the building. Unfortunately, the owner quickly ran out of liquidity and could not repay the loan to the bank. The bank needed to know the current status of its loan and how the renovations could impact its security.

In this case, our team had to make sure the intended change of use would not negatively impact the value of the underlying asset (i.e. the building). By allowing the renovations to go ahead, the Bank could potentially increase its financial exposure, especially if the building’s market value after renovations did not increase at least by the cost of renovations. Construction liens registered against the building could potentially rank in priority to the bank’s claim in a realization.

After reviewing the projected cash flow to complete the renovations, while taking into account possible cost overruns, and the analysis of the various construction liens, we recommended to:

  • Sell the building under receivership;
  • Stop the renovations;
  • Contest the validity of the various construction liens as they did not increase the value of the building.

Using the resources at our disposal to properly evaluate the market value of real estate across Canada, we managed to limit the cost for the bank by accurately assessing, that despite all the renovations done to the building, it did not improve the value, thus rejecting the construction liens.

Our knowledge of the various laws and provincial regulations allowed us, in this case, to navigate the different risks that could arise when dealing in the real estate market.

Case 3: The Client / Supplier Relations

A longstanding Canadian cross-border transport company with operations across North America used its own fleet of trucks to deliver merchandise to interline companies in major U.S. cities who in turn, aggregated those loads from various transport companies for final delivery to the end destination. This particular relationship benefited the Canadian company by allowing it to reach a broader client base by expanding the geographical reach of their services, while keeping their costs at a sustainable level.

A combination of several external market factors, including reduced manufacturing activity levels, rising wages and fuel costs and unfavorable foreign exchange resulted in significant consecutive losses for the company. After the bank reviewed the company’s situation, they requested our help in assessing their risk, along with a road map for next possible steps.

In this case, the business dealings with the interline companies made the company vulnerable in its capacity to collect its account receivable, since the interline transport companies could take the merchandise hostage to get paid under various transport liens. Given the situation, this could significantly reduce the value of accounts receivable subject to bank’s security.

Our team’s in-depth knowledge of the transportation field allowed for a plan that helped the company collect its receivables and mitigate the impact the interline company had on its ongoing operations.

While the initial reaction of the bank was to shut down the operations and send out notices to get paid, we convinced the bank and the creditor to work hand in hand to maximize the realization of the assets.

KYC is a basic part of banking, but does-it provide the in-depth knowledge required to handle the various situations and challenges a banker will be exposed to while managing their clients? It is easy to believe that with all of your client’s information, you know everything there is to know. But at times, it is worth asking for an external consultant to assess a situation in order to get a 360-perspective into who your client is dealing with and how so that you can understand your client’s full story. Thanks to MNP’s consultant’s expertise in numerous industries and sectors, we are able to provide our partners and clients with the whole picture.

Oliver Boyd is a Licensed Insolvency Trustee serving our Montreal region. To learn more about how MNP Debt can help you, contact our local office at 514-932-4115.