No credit portfolio is free of problem loans. Businesses stumble, markets turn and assumptions that looked sound at closing prove optimistic. A lender that claims otherwise has either not been lending long or is not looking closely. The useful question is not whether loans will be tested, but how a lender behaves when they are.
In our view, the answer should be written down well before it is needed. A workout handled under a clear policy tends to produce better outcomes, and fairer ones, than a workout improvised under pressure.
See it early
The best workouts begin before a default. Internal risk ratings reviewed regularly, covenant reporting read carefully and open lines of communication with borrowers give a lender time to act while options are still broad. Slate Blue Harbor keeps a watch list of credits showing early signs of strain, so that attention arrives before a crisis rather than with one.
“The earliest conversation is usually the most productive one.”
Decide how decisions will be made
When a borrower is in difficulty, a lender faces choices that pull in different directions: grant an amendment or an extension, inject further capital, enforce on collateral, or take ownership of the business. Each choice affects investors differently, and in a multi-platform firm, it may also affect other parts of the firm that have a relationship with the same company.
- A defaulted and distressed asset workout policy that sets out who decides and on what basis.
- A liability management and amend-and-extend policy, so concessions are granted for reasons, not habit.
- Valuation of troubled loans by a committee independent of the team that made them.
- Conflicts handled under the firm-wide matrix when another platform is involved with the same borrower.
Fairness and transparency
Workouts are where a lender's character becomes visible. Borrowers, co-lenders and investors all watch how a manager behaves when interests diverge. A lender that is firm, consistent and transparent about its process earns a reputation that makes future negotiations easier. One that changes its approach from case to case invites disputes.
For investors, the right time to ask about workouts is before committing capital, not after the first default. A manager's answer, and whether it points to a written policy, says a great deal about how the portfolio will be managed when it matters most.
Perspectives are general information and reflect the views of Slate Blue Capital at the time of writing, which may change without notice. They are not investment, legal or tax advice, do not describe or offer any security, fund or service, and should not be relied on in making an investment decision. See Important information.