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Playbooks

When things go wrong

Capital Provider

When things go wrong

Distress happens. Originators miss covenants, portfolios deteriorate, triggers trip, and wind-downs begin. Your response in the first 30 days determines whether you recover 95 cents or 65 cents on the dollar.

This section covers the capital provider’s playbook for distressed ABF positions: how to recognize distress early, decide between waiver, amendment, or acceleration, protect your position, and execute a workout from your side of the table.

The three levels of distress

Distress in ABF comes in three forms. The distinction matters because each requires a different response.

LevelWhat’s HappeningYour RiskPrimary Concern
Originator-levelCompany struggling (liquidity, management, operations)CounterpartyProblems could spill into your deal
Portfolio-levelAssets underperforming (delinquencies, losses)CollateralYour facility is impaired
StructuralTriggers tripped, cash trapped, technical defaultDeal mechanicsStructure working against you

These often overlap. An originator under pressure makes bad underwriting decisions, which impairs the portfolio, which trips triggers. Or portfolio deterioration reduces excess spread, which traps cash, which starves the originator.

The decision framework

When something goes wrong, you have three paths.

SituationResponseWhen to Choose
Technical breach, healthy creditsWaiverOne-time event, cause identified and cured
Deteriorating performance, salvageableAmendmentProblem real but manageable, credible turnaround
Terminal decline or bad actorAccelerationOriginator can’t execute, relationship broken

Choosing wrong is expensive. A waiver when you should have amended gives away leverage. An amendment when you should have accelerated throws good money after bad. Acceleration when you should have amended destroys value you could have recovered.

Detailed guides

This overview introduces the framework. The detailed guides below provide actionable checklists and decision trees for each phase of distress management.

Recognizing distress early

Early warning signals at the originator, portfolio, and structural level. Monitoring frameworks, signal interpretation, and when investigation becomes action required.

Key content:

  • Originator-level signals (reporting delays, departures, funding attempts)
  • Portfolio-level signals (delinquency trends, vintage curves, concentration drift)
  • Structural signals (trigger headroom, utilization, OC erosion)
  • The signal interpretation framework: single signal vs. pattern vs. action required
  • Building a monitoring framework (weekly, monthly, quarterly, annual)

Waiver, amendment, or acceleration

Decision frameworks for each path. When to waive, what to extract in amendments, and the pre-acceleration checklist. Includes the waiver trap and forbearance mechanics.

Key content:

  • Waiver decision checklist and mechanics
  • Amendment negotiation menu (pricing, structural, monitoring concessions)
  • Amendment process timeline
  • Acceleration prerequisites and preparation
  • Recovery comparison framework
  • Forbearance as a bridge

Protecting your position in distress

Perfection verification, account protection, reserve enhancement, and standstill mechanics. What to check the moment distress signals appear.

Key content:

  • The perfection checklist (UCC filings, control agreements, backup servicer)
  • Account protection measures (lockbox verification, remittance tightening)
  • Reserve account verification
  • Information rights enhancement
  • Standstill and forbearance documentation
  • Documentation best practices for contemporaneous records

Executing a workout

The three phases: assessment (days 1-14), negotiation (days 15-45), and execution (days 30-90+). Workout structures that work.

Key content:

  • Phase 1: Legal review, collateral valuation, servicer assessment, creditor landscape
  • Phase 2: Amendment negotiation framework, wind-down negotiation, alternative exits
  • Phase 3: Documentation, enhanced monitoring, servicing transfer, collateral disposition
  • Structures: amend and extend, pay-down and release, facility sale, management change

Enforcement and liquidation

Acceleration mechanics step-by-step, servicing transfer execution, collateral disposition options, and recovery expectations by asset class.

Key content:

  • Six-step acceleration process (notice, acceleration, trustee direction, accounts, servicer, borrowers)
  • Servicing transfer preparation and execution
  • Liquidation options (orderly run-off, bulk sale, tranched sale, REO)
  • Recovery expectations by asset class (performing and NPL)
  • UCC Article 9 requirements and consumer loan overlay
  • Deficiency rights by state

Intercreditor dynamics in distress

Managing workouts when you’re not the only creditor. Common structures, conflict scenarios, and creditor-on-creditor dynamics.

Key content:

  • Intercreditor agreement provisions to know
  • Common structures (senior/sub, pari passu, first-out/last-out, mezz)
  • Conflict scenarios and resolution approaches
  • Understanding each party’s economics
  • Buy-out strategies
  • First-mover considerations

What your originator is experiencing

While you’re protecting your position, your originator is trying to save their business. Understanding their perspective helps you negotiate effectively.

Where interests align:

  • Neither party wants liquidation (destroys value for both)
  • Both benefit from orderly wind-down versus fire sale
  • Maintaining servicing quality protects collateral for both

Where interests diverge:

  • Flexibility versus protection
  • Continued origination versus moratorium
  • Economics (spread increases, fees)
  • Discounted exit terms

Negotiating leverage: You control the facility. Without it, the originator may not operate. But you need them to service the collateral well. Pushing too hard damages servicing quality and hurts recovery.

Finding the balance is the art of workout negotiation.

Cross-references

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