When a Borrower Hits Distress: What a Disciplined Workout Actually Looks Like

 

Every lender eventually has a borrower run into trouble. What separates a well-run credit book from a troubled one isn’t whether distress happens. It’s what the lender built in advance to handle it.

 

On a recent webinar introducing Garrington Private Credit to the US market, our President and Chief Credit Officer, Tammy Kemp, was asked directly how Garrington handles a borrower in distress. Her answer, and the example she gave, says a lot about how the fund is structured to manage risk before it becomes a loss.

 

The best defense is identifying the problem early

 

Tammy’s approach starts well before any payment is missed. “The best defense is a good offense,” she said. “A big part for us is identifying those issues early and giving ourselves the luxury of some time to make a good decision. You’re watching for trends, you’re watching for changes, you’re watching for hiccups or issues on the horizon, and then being open and honest with our borrower about that problem.”

 

That early identification matters because it buys time.

 

A lender who spots a problem months before it becomes acute has options a lender who finds out at the point of default does not.

 

A real example

 

Tammy walked through a client where Garrington had provided a facility secured by receivables, inventory, and equipment. The borrower had overspent on R&D and on opportunistic purchases of inventory, expecting those investments to convert into a large sale that ultimately didn’t materialize.

 

“So how do you manage that?” Tammy asked. “You’ve got a good pipeline, and you have good customers. You create the opportunity for those customers to buy the product that you’ve manufactured for them. You match that up with collection of the receivable as you’re delivering that inventory. So, you’re smartly spending money and winding down the business at the same time, working with those appraisers to sell that inventory.”

 

The wind-down wasn’t a liquidation in the conventional sense. It was a managed process: using existing customer demand to move inventory, collecting on receivables as product was delivered, and bringing in the same appraisal expertise used at origination, professionals who not only value collateral but actively sell it, to place equipment and remaining inventory at real market value.

 

Why personal guarantees matter

 

One detail Tammy pointed to directly: personal guarantees from the business owners. “You have personal guarantees from the owners of the business, and that incentivizes cooperation as you work through the problems.” A guarantee changes the borrower’s incentives during a workout. Cooperation becomes the rational choice, not just the polite one.

 

What this reflects about the underlying model

 

This example is a direct extension of everything Garrington underwrites for at origination. The facility was secured by tangible, identifiable collateral. Field examiners and appraisers had already established real values for receivables, inventory, and equipment before the loan was made. When the borrower’s plan didn’t work out, the same collateral discipline that shaped the original loan terms shaped the recovery.

 

That’s the case for senior secured, asset-based lending done the right way. It isn’t only a return driver when things go well. It’s the mechanism that gives a lender some real options when they don’t.

 

 

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