When banks acquire other institutions, they often inherit credits that don’t neatly fit their own standards. In the latest installment of Jason Alpert’s Workout Window column, a newly acquired lower-middle-market borrower has a $5.25 million revolving line that was loosely structured, lightly monitored, and routinely over-advanced by their previous bank. Now the borrower is asking for modified terms to support slower customer payments—changes that would increase an already uncollateralized over-advance.
Alpert’s guidance boils down to a disciplined but flexible approach that tackles all three issues—structure, monitoring, and the over-advance itself: evaluate the borrower’s request, restructure the facility, and keep your exit options open.
Run dual paths from the start. Alpert says the borrower’s transparency is a good reason to continue evaluating the request. His recommendation: evaluate the requested terms while pursuing a restructure to bring the loan into policy compliance. Because the borrower is already over-advanced “they are inherently overleveraged.” To make matters worse, with revenues “flatlining” they are not positioned to grow out of it.
Restructure the credit into two loans. Alpert advises bifurcating the exposure:
- A working capital line sized to what the borrower can support.
- A permanent working capital term loan for the remaining balance/over-advance.
“The reason for two loans,” he explains, “is that each has a different repayment source and thus a different risk profile.” The working capital line is repaid by current assets converted to cash, while the permanent working capital loan is “repaid by profits turned to cash.” Both would share collateral, but the permanent working capital loan “will be under-secured because the value of the working capital assets is insufficient.”
Address the collateral gap—but carefully. To shore up that under-secured piece, Alpert suggests one option: asking the borrower, through its single-asset entity, to provide a second mortgage on the owner-occupied real estate, if the existing first-mortgage lender and the borrower are both amenable.
Keep the restructure tight—or move to an exit. Restructured loans should stay on “a tight leash (a duration of less than 12 months)” with strong reporting, covenants, and possibly a turnaround consultant.
If the borrower can’t pledge more collateral—or the turnaround runway is too long—Alpert says it’s time to “encourage or require the borrower to obtain alternative financing,” including private credit options the bank can help identify.
The bottom line: Whether restructuring or exiting, Alpert is clear: “maintaining control of the timeline and terms is key.” Acquired credits require discipline, clear-eyed assessment, and the willingness to be both creative and firm as legacy practices give way to current policy.
