Challenges You Will Face Implementing Debt Management Strategies

This article is part of the Debt Policy Series. The first part of the series can be found here.

Anytime a company does something new and exciting, there’s usually two types of people that speak into the implementation. There are the Visionaries — those that look for the new things that can transform their business vertical in revolutionary ways. There are also the Status Quo Incumbents — the people who don’t like change and are at most willing to implement evolutionary changes. They’re usually counterparts at the same organization, and they always get stuck on the same projects.

Like me, most of you who read this will probably be the former. Don’t be discouraged, your SQI counterpart serves a useful purpose, and often prevent us Visionaries from getting too far in front of our skis when we get excited about a new idea. They’re going to help balance out our enthusiasm and force us to prioritize the most important parts of these new policies and controls we want to implement.

The truth is that the type of analysis needed to establish these standards can be complex, even if it appears relatively simple in concept. Describing the affects of debt on our individual assets and modelling the entire debt portfolio is hard. It’s going to be a challenge, but it’s not insurmountable.

The Biggest Challenge

You’re going to need sign-off on this if you want to implement this across your entire org. You’re going to need high quality data about past debt performance to make this case. Top management won’t base these types of decisions on data which it does not understand, nor data in which it does not have great confidence. This will be a primary obstacle, if this data is not already readily available.

If the data isn’t already available, then you’re going to have to make the data. The best stories are based around quantifiable results — it doesn’t need to be a doom and gloom answer in order for you to be heard. In fact, you probably want to avoid fearmongering if you want to be taken seriously. A good first step is just to analyze your past borrowing habits and see how much the debt cost you versus an optimal outcome.

For example, if your firm has a habit of borrowing for longer than they hold, you can easily quantify how much profit was left on the table and make a case for policies in place to limit loan terms. If your firm is a fixed-only borrower, you can demonstrate how floating rates almost always win in the long run, and suggest hedging strategies for skeptics. With rates on the rise and odds of a recession looming, you can suggest implementing policies to help prepare for the next loosening cycle.

Better Late Than Never

Raise your hand if this sounds familiar. When times are good, there’s no need to change our debt management policies because the money is flowing and we can easily cover our debt service. Why would we change what we’re doing? When the tides shift and suddenly everything is blowing up around you, we don’t need to change anything because it’s already too late to do anything about it.

I don’t have an answer for how to address this internally inside your own firm, but it’s better late than never to put good policies in place. In fact, it might be worth pointing out what bit you this time around so you can put policies in place to help alleviate the pain next time. It’s also worth pointing out that all tightening cycles are shortly following by loosening cycles, so don’t get so defensive that you get bit again on the way back down.

Don’t let today’s pain prevent you from preparing for the next time it happens. Humans are impatient creatures — we don’t naturally think long term. Putting policies and controls in place helps us remain vigilant and ready for the next time there’s a “steepest rate hike in history”.

This is Part 6 (of 6) of the Debt Management Policy series.

If you’ve made it this far, I hoped you found at least part of this series helpful. If you have any ideas or suggestions about how this policy concept can be improved, reach out to me on Twitter or LinkedIn. The links to my pages can be found at the bottom of this article.

The Debt Management Policy is a short series of articles that provide the resources and materials for building and establishing Debt Management Policies for your own CRE firm.

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