Part Three of Three: How a Workout Actually Works

 

 

In Part One, we talked about the capital stack and why position matters. In Part Two, we talked about collateral, and why not all of it behaves the same way under stress. This is where the theory gets tested. A default is the moment everything we described in Parts One and Two either holds up or it doesn’t.

 

 

A default is not a cliff. It is the point where the structure built in Parts One and Two starts to do the work it was designed for. The first legal claim from Part One and the real, appraisable collateral from Part Two only matter if there is a disciplined process behind them when things go wrong.

 

 

We plan for the moment a loan goes wrong before we ever fund it. That is how we win by not losing.

 

 

We plan the exit before we fund the loan.

 

 

Every credit we underwrite is stress-tested against a downside scenario before it closes. We ask what our recovery path looks like if the borrower cannot pay, not as a formality, but as part of the decision to lend at all.

 

 

Warning signs arrive before the default does.

 

 

Between the reporting we require, the covenant testing built into our loan documents, and the field examinations conducted by independent examiners, we typically see stress building before a payment is missed. Early warning gives us more options and more time.

 

 

The playbook.

 

 

Once a loan is in default, our first move is not liquidation. It is engagement: direct conversations with borrower management, a closer look at cash flow and collateral condition, and an assessment of whether the business has a viable path forward. From there, options range from forbearance and covenant amendments to restructuring the facility, to, where necessary, enforcing our security and realizing on collateral.

 

 

Enforcement without complication.

 

 

This is not an occasional advantage. Our loan book typically runs at 95% to 100% first lien positioning, and being the sole secured lender on specific assets, with no competing lien holders to negotiate with if enforcement becomes necessary, is where we aim to sit at all times. A workout with one secured creditor at the table moves faster and stays cleaner than one with several parties arguing over priority.

 

 

Why we do not rush to liquidate.

 

 

A business kept operating is often worth more than one shut down and sold for parts. Where a borrower can be stabilized, an orderly workout preserves more value than a fire sale. Liquidation is a tool we are prepared to use, not the first one we reach for.

 

 

The number behind the process.

 

 

Since our Strategy inception in June 2015, our average bad-debt expense has stayed well below 1% of net funded capital, calculated net of recoveries on accounts in work-out. In a few periods, recoveries have actually exceeded write-offs, producing a negative impairment rate. That number is not an accident. It is the direct result of the position, the collateral, and the process described across this series.

 

 

What this means for investors.

 

 

Position matters. Collateral matters. But neither means anything without a disciplined process for the moment they are tested. That is the piece most private credit conversations leave out, and it is the piece we built this series around.

 

Final Thought

 

 

Across this series, we have walked through where we sit in the capital stack, what we lend against, and what happens when a loan does not go as planned. We cannot predict which loans will go wrong. We can control how prepared we are when one does.

 

 

 

No predictions. No complexity. Just disciplined underwriting against real collateral.