Deal autopsy: why deals fail

Most ABF education focuses on how deals get done. This topic covers the opposite: why they fail. Understanding common failure modes helps originators avoid preventable mistakes and helps capital providers recognize early warning signs before they’ve invested months in a transaction that won’t close.

The patterns here come from observing dozens of failed or abandoned transactions. Some died at the first meeting. Others made it through months of diligence and documentation before collapsing. A few closed and then failed, which is the most expensive outcome for everyone.

The failure taxonomy

Deals fail at different stages, and the stage tells you something about what went wrong.

Pre-IC failures: never got to committee

These deals get screened out early, usually after an initial meeting or preliminary data review. Common reasons:

Insufficient track record. Less than 12 months of vintage data means there’s no way to validate loss curves or recovery assumptions. Capital providers need to see how assets perform through their full lifecycle.
Asset class too novel. No comparables means no benchmarks. You’re asking capital providers to underwrite something they can’t price against anything.
Economics don’t work. Even at aggressive advance rates, the math doesn’t pencil. The originator’s required return is incompatible with market pricing.
Originator undercapitalized. A $5M facility with a 20% equity requirement needs $1M. If the originator can’t demonstrate they have that capital (plus 12-24 months of operating runway), the deal won’t proceed.
Red flags in initial data. Loss rates 2x above stated expectations. Vintage curves that show acceleration in recent cohorts. Data quality issues that suggest the tape isn’t reliable.

IC rejection: got to committee, didn’t pass

These deals made it through initial screening and preliminary diligence, but the investment committee said no. This typically means:

Credit risk outside mandate. The loss profile, after stress testing, doesn’t fit the fund’s return requirements or risk tolerance.
Structural issues that couldn’t be mitigated. Cash flow timing problems, legal complexity, or regulatory uncertainty that no amount of structuring could solve.
Key person or operational risk. The business depends entirely on one or two people, with no succession plan and inadequate operational infrastructure.
Regulatory concerns. Pending litigation, regulatory inquiries, or business practices that create headline risk.
Pricing gap too wide. After all the negotiation, the originator needs 400 bps more than the capital provider can offer. No path to consensus.

Walk-aways: died in diligence or documentation

These deals had a term sheet, sometimes even advanced documentation, before someone walked away. Causes include:

Diligence findings that changed the risk profile. The summary materials didn’t match the source data. Sample file review revealed systematic underwriting exceptions. Third-party reports flagged material issues.
Documentation requirements unachievable. The originator couldn’t deliver required representations and warranties. Perfection issues couldn’t be cured. Servicing agreement terms remained unacceptable.
Terms changed during documentation. Market conditions shifted. The capital provider needed tighter covenants. The economics that worked at term sheet no longer worked with final docs.
External events. Market dislocation. Key personnel departure. Regulatory announcement. M&A activity.
Relationship breakdown. Repeated schedule slippage, unresponsiveness, negotiating in bad faith. The capital provider loses confidence in management.

Post-close failures: facilities that terminated early

The most expensive failures are deals that closed but shouldn’t have. Early termination damages both parties: the capital provider has impaired assets, and the originator has a failed facility on their track record.

Performance deterioration. Vintages perform worse than underwritten. Triggers trip. Acceleration events occur.
Covenant breach. Financial covenants (tangible net worth, liquidity), performance triggers, or reporting violations that aren’t cured within the remedy period.
Fraud or misrepresentation. Loans that don’t exist. Fabricated borrower information. Manipulated performance data.
Originator business failure. Unable to continue originating. Key person departure. Strategic pivot away from the product line.

IC rejection reasons: what gets a deal killed

Investment committee rejections fall into four categories: credit, structure, operations, and pricing.

Credit concerns (most common)

Credit kills more deals than anything else. Specific issues:

Loss rates above mandate threshold. If your weighted average loss rate is 8% and the fund targets assets with sub-5% losses, you’re not a fit. No amount of structuring changes that.

Insufficient vintage depth. 12 months is the minimum; 18-24 months is preferred. Capital providers need to see how assets perform through their full lifecycle, including recovery. A consumer loan portfolio needs to show performance through at least one economic mini-cycle.

Concentration risk. Geographic concentration (80% California), employer concentration (30% from three employers), or product concentration (all adjustable rate) all create single-point-of-failure risk.

Recovery rate assumptions unsupported. If you’re projecting 60% recoveries on defaulted loans, you need historical data proving that. Generic industry benchmarks won’t cut it.

Stressed scenario wipes out subordination. The standard stress test: what happens if losses are 2x your base case? If that scenario wipes out the equity tranche and impairs the capital provider’s position, the deal won’t pass.

Structural issues

Advance rate math doesn’t work. At any reasonable advance rate, after accounting for interest reserve, servicing costs, and required credit support, the facility doesn’t provide enough proceeds to make sense for the originator.

Cash flow timing mismatch. Asset duration of 36 months with liability duration of 12 months creates refinancing risk. Interest rate mismatch (fixed rate assets, floating rate liability) creates margin compression risk.

Servicing transition risk. If the originator fails and servicing needs to transfer to a backup servicer, can that transition happen without material value destruction? Some asset classes (equipment with maintenance requirements, complex litigation finance) have high transition costs.

Legal structure complexity. Multiple jurisdictions, novel SPV structures, or untested legal opinions all create execution risk that capital providers may not want to take.

Operational red flags

Operations kill deals quietly. Common issues:

Key person risk. One underwriter makes all decisions. One engineer maintains all systems. No succession plan exists.
Servicing platform inadequate. Can handle current volume but won’t scale 3x without breaking.
Reporting systems can’t produce required data. Asset-level tapes take two weeks to generate. No ability to produce daily reports during amortization events.
High staff turnover. Collections team has 50% annual turnover. Training documentation doesn’t exist.
Poor audit trail. Underwriting decisions aren’t documented. Can’t trace why a specific loan was approved.

Pricing gap

Sometimes the deal just doesn’t price:

Originator return requirements incompatible. The originator needs a 25% ROE on the assets. At market rates, they’d get 15%.
No path to consensus on advance rate. Originator wants 90%. Capital provider says 75%. Neither will move more than 2-3 points.
Fee expectations misaligned. Commitment fees, unused fees, amendment fees add up. The all-in cost is higher than the originator modeled.
Minimum size too small. $10M facility request, but the capital provider’s minimum efficient deal size is $25M. Fixed costs (legal, diligence, servicing setup) don’t justify the commitment.

Walk-aways: when deals die mid-process

Walk-aways are particularly painful because both sides have invested significant time and money. Understanding why deals die mid-process helps you avoid repeating these patterns.

Diligence findings that kill deals

Data room materials don’t match summary presentation. The pitch deck showed 4% cumulative losses. The loan tape shows 6.5%. This gap destroys trust immediately.

Sample file review reveals underwriting exceptions. Capital providers review 50-100 actual loan files. If 15% have exceptions to stated underwriting criteria (income verification skipped, DTI above threshold approved anyway), the stated policies aren’t real policies.

Third-party reports flag material issues. Legal counsel identifies regulatory exposure. Servicing assessments find inadequate systems. Accounting review reveals inconsistent treatment. These reports exist to find problems, and finding problems is their job.

Historical loss curve revised upward. The originator “finds” additional losses that weren’t in the original data. Or they revise their loss methodology mid-process. Either way, the base case just changed.

Reference calls raise concerns. Prior capital providers who won’t give references. Vendors who mention payment issues. Former employees with stories about management. Reference calls are diligence on people, not assets.

Documentation failures

Originator can’t deliver required reps and warranties. “We can’t represent that every loan meets the eligibility criteria” is a deal-killer. The whole structure depends on the assets being what you say they are.

Disclosure schedules reveal undisclosed exceptions. The process of drafting disclosure schedules surfaces issues that should have been disclosed earlier. Pending litigation. Regulatory inquiries. Key contract terminations.

Servicing agreement terms unacceptable. Transfer provisions inadequate for the capital provider. Performance standards too vague. Termination triggers either too hair-trigger (originator concern) or too loose (capital provider concern).

UCC filing or perfection issues. Prior security interests that weren’t disclosed. Filing gaps. Collateral descriptions that don’t match the actual assets. These are usually curable, but they delay closing and create concerns about what else wasn’t disclosed.

External events

Market dislocation. Spreads widen 50 bps. The deal that worked at term sheet no longer works at closing. Neither party is at fault, but the deal dies anyway.

Alternative financing appears. A competitor offers the originator better terms. An investor offers equity instead of debt. The originator’s alternatives changed.

Key personnel exit. The CFO who was managing the process leaves. The CEO who was the key relationship departs the capital provider. Deals depend on people.

Regulatory announcement. A new rule. An enforcement action against a similar business. A policy statement that changes the risk calculus.

Relationship breakdown

Some deals die because the relationship breaks down:

Repeated schedule slippage. “We’ll have the data room complete by Friday” becomes a pattern of missed deadlines.
Unresponsive to diligence requests. Questions go unanswered for weeks. Follow-ups get ignored.
Change of negotiating position without justification. Terms agreed in principle get reopened without explanation.
Lack of transparency on material issues. Problems get hidden until they’re discovered.
Capital provider loses confidence in management. The sum of small issues creates a trust deficit.

Documentation failures: last-mile problems

Many deals fail in documentation, after term sheet and well into legal drafting. These failures are expensive because of accumulated legal fees and time investment.

Representations and warranties

Reps and warranties are promises about the assets and the originator. Documentation fails when:

Originator unwilling to rep to asset-level eligibility. The capital provider requires: “Each receivable in the pool meets the eligibility criteria.” The originator responds: “We can only rep that our policies require assets to meet the criteria.” That’s not the same thing.

Disclosure schedules reveal undisclosed exceptions. When drafting “except as disclosed in Schedule 3.1,” the exceptions turn out to be material. Prior litigation. Regulatory inquiries. Key contract provisions.

Bring-down rep at closing can’t be made. Between signing and closing, something changes. Financial condition deteriorates. A lawsuit is filed. The closing condition of reaffirming all reps can’t be satisfied.

Perfection and title issues

Security interests must be properly created and perfected. Problems include:

UCC filings not properly maintained. Continuation statements not filed. Wrong entity name. Wrong jurisdiction.
Prior security interests not released. A prior lender has a filing that was supposed to be terminated but wasn’t.
Chain of title documentation gaps. Can’t document clean transfer from originator to SPV.
Servicer transfer documents incomplete. Rights to service the assets weren’t properly assigned.

Corporate matters

Sometimes the problem is with the originator’s corporate organization:

Organizational documents conflict with deal. Articles of incorporation restrict debt incurrence. Shareholder agreements require consents that can’t be obtained.
Board approval not obtained. The transaction requires board authorization, but the board won’t approve or can’t meet.
Change of control provisions triggered. A pledge of equity interests triggers change of control provisions in other contracts.
Financial statements not auditable. Capital provider requires audited financials, but the originator’s books can’t be audited in their current state.

Post-close failures: deals that closed but shouldn’t have

The most expensive failure is a deal that closes and then terminates early. Both parties suffer: the capital provider has an impaired asset, and the originator has a terminated facility on their track record that they’ll need to explain to every future capital provider.

Performance deterioration

Vintage performance worse than underwritten. The base case assumed 5% cumulative losses. Actual losses are tracking to 8%. By month 12, it’s clear the deal was mispriced.

Seasonal effects larger than modeled. Consumer lending often has Q1 weakness (post-holiday). If this wasn’t properly modeled, the first Q1 surprises everyone.

Macro environment shift. Unemployment rises. Interest rates change. Regulatory environment shifts. External factors that weren’t in the base case scenario.

Portfolio composition drift. The eligibility criteria allow a range of assets, but the actual pool drifted toward the riskier end. Average FICO dropped from 700 to 680. Average loan size increased 20%.

Covenant breaches

Facilities include financial and performance covenants designed to provide early warning of problems:

Financial covenants breached. Tangible net worth falls below the required level. Liquidity covenant triggers because the originator drew down reserves to fund operations.

Performance triggers tripped. Monthly loss rate exceeds threshold. Delinquency rate exceeds threshold. The triggers were set to identify deterioration early.

Reporting covenant violation. Monthly servicer report delivered late. Annual audit not completed on time. Reporting covenants seem minor until they’re breached.

Cure period expired without remedy. Most covenants have cure periods (15-30 days). If the originator can’t cure within that period, the breach becomes an event of default.

Fraud and misrepresentation

The worst-case scenario:

Loans don’t exist or are duplicated. The collateral count doesn’t match reality. The same loan appears in multiple pools.
Borrower information fabricated. Incomes inflated. Employment fabricated. Identity fraud.
Performance data manipulated. Delinquencies hidden. Charge-offs delayed. Collections reported that didn’t happen.
Undisclosed related-party transactions. Loans to insiders. Payments to related entities. Self-dealing.

Fraud cases typically trigger immediate acceleration and often result in litigation.

Originator business failure

Sometimes the originator’s business fails, regardless of asset performance:

Unable to continue originating. Capital constraints prevent continued origination. The facility amortizes down because there’s no new volume.

Key person departure. The founder leaves. The head of underwriting joins a competitor. The expertise that made the business work walks out the door.

Loss of critical vendor or partnership. The technology provider terminates. The marketing channel closes. The referral partner relationship ends.

Strategic pivot. The originator decides to focus on a different product line. The ABF-funded assets become a legacy portfolio.

Lessons learned: pattern recognition

After observing dozens of failed transactions, certain patterns emerge.

For originators

Don’t approach capital markets prematurely. The minimum viable track record is 12 months of vintage data, preferably 18-24 months. Approaching the market too early wastes your time and damages your reputation.

Ensure your data room is audit-ready before the first meeting. If you can’t produce a complete loan-level tape, audited financials, and full policy documentation within one week, you’re not ready. See the pre-diligence checklist below.

Model the full cost of capital before committing to terms. Include all fees (commitment, unused, amendment), required reserves, advance rate impacts, and covenant compliance costs. The headline rate is not your all-in cost.

Build relationships before you need capital. Start conversations 12-18 months before you need to close. Capital providers take time to get comfortable with new originators.

Have a backup plan. If this deal falls through, what’s Plan B? Equity? A different capital provider? Slower growth? Having alternatives strengthens your negotiating position and ensures survival if the deal doesn’t close.

For capital providers

Early diligence saves late-stage failures. The red flags visible in initial data review predict most failures. Don’t invest months in a deal with obvious problems hoping they’ll resolve.

Reference calls are essential, not optional. Talking to prior counterparties, vendors, and former employees reveals things that data rooms don’t. Make time for thorough reference checks.

Trust but verify all summary materials against source data. The pitch deck shows one number. The loan tape shows another. Always reconcile summary statistics to source data.

Walk away early if red flags appear. Sunk costs are sunk. A deal that’s problematic in month 2 rarely gets better by month 6. The discipline to kill deals early saves far more than it costs.

Document your IC rejection reasons for pattern recognition. Keep a log of why deals failed. Over time, you’ll develop better early-warning indicators that save diligence time.

Pre-diligence readiness checklist

Before approaching capital markets, confirm you can answer “yes” to each of these:

Dimension	Readiness Check
Track record	Do you have 18+ months of vintage data with complete loss and recovery history?
Economics	Can you articulate your all-in cost of capital, including all fees and advance rate impacts?
Data quality	Can you produce a complete, accurate loan-level tape within 48 hours?
Operations	Is there a documented servicing succession plan?
Regulatory	Are there any open inquiries, litigation, or regulatory concerns?
Capitalization	Can you fund the equity requirement for the next 24 months without new outside capital?
References	Will prior counterparties (banks, vendors, partners) speak positively?

If you can’t answer “yes” to all of these, address the gaps before approaching capital providers.

Red flags checklist for capital providers

Use this checklist during initial screening and diligence:

Track Record Red Flags

Less than 12 months of performance data
Vintage curves show recent deterioration
Loss rates above comparable benchmarks
Recovery assumptions unsupported by historical data
Recent change in underwriting criteria

Operational Red Flags

Key person risk with no succession plan
Servicing platform not scalable
Reporting systems inadequate
High staff turnover in critical functions
Poor documentation of underwriting decisions

Financial Red Flags

Insufficient liquidity for equity requirement
Deteriorating financial condition
Financial statements not auditable
Unrealistic growth projections
Unclear use of proceeds

Process Red Flags

Repeated schedule slippage
Unresponsive to diligence requests
Data room materials inconsistent with presentations
Reluctance to provide references
Negotiating position changes without explanation

Regulatory Red Flags

Important: The most expensive deal failure is the one that closes. A facility that terminates early due to performance issues or fraud costs both parties far more than a deal that dies in diligence. Walk away early when red flags appear.

Note: Before launching a capital raise, conduct a “pre-diligence” exercise: can you produce a complete loan-level tape, audited financials, and complete policy documentation within one week? If not, you’re not ready.

Cross-references

The Top Mistakes Originators Make covers preventable errors in detail
Term Sheet Anatomy explains the documentation stage where many deals fail
Your Loan Tape: What Lenders Actually Look At describes what capital providers are looking for
Triggers, Tests, and Performance Events details the post-close failure mechanisms