A Practical Approach to Exogenous Events

At the time of publication of this book, many countries have experienced fresh COVID-19 lockdowns. New variants have started to develop and spread across the globe, driving a resurgence of further infections, hospitalizations, and deaths. Covid-19 represents an extreme example of an exogenous shock. Natural disasters (Acts of God), wars, revolutions, etc., are further examples and are often referred to in common parlance as “force majeure.” This chapter lays out a methodology for approaching workouts in such situations. To frame the discussion, the chapter begins with a focus on the distinction between proximate and fundamental, and exogenous and endogenous drivers, relying again on the manufacturing case study and the opening Bank of Commerce tale. Thereafter, the two exogenous shocks (a tropical cyclone and the pandemic) are presented. In each case, the work analyzes the impact on and restructuring requirements of: (i) a financial institution; and (ii) a manufacturing and services company, respectively. The special characteristics of these cases include the: (i) the speed and pervasiveness of the shocks; (ii) the uncertainty of their degree and duration; and (iii) the challenges to devise effective mitigation techniques into the structure due to weak predictability of the subsequent income stream, liquidity, and solvency of borrowers. The chapter ends with a discussion of three basic alternative approaches for restructurings in cases of uncertainty.