A field exam that blows up confidence in a borrower’s borrowing base calls for a reset, not a tune-up. In our latest Ask the Workout Window scenario, accounting entries don’t reconcile, management can’t explain calculations, the borrower is out of compliance and materially over-advanced, and liquidity is gone. Jason Alpert’s advice: move quickly from relationship management to risk containment—especially with working-capital collateral that can leak or evaporate. Here are more of his suggestions:
Issue the default and take control early. Alpert says the credit should be downgraded and transferred to workout. He recommends “immediately” issuing “a formalized default letter for the over-advance (and any other defaults)” and beginning to “start taking control of the situation.” The goal is to prevent further collateral erosion and limit additional exposure.
Get the borrower (and guarantors) in the room—fast. Alongside the default notice, notify the borrower and any guarantors and request a meeting to walk through the field exam findings, discuss next steps, and request “any/all information” needed to understand operations and results. Even if reports are unreliable, what the borrower can provide may still be “somewhat helpful,” Alpert notes—just “taken with a large grain of salt.”
Run the first workout meeting like it’s evidence. At that meeting, introduce the workout banker and establish the new risk-containment posture. Alpert recommends having two bank reps present, taking “very good minutes,” and emailing attendees afterward to create a “transcript” of the interaction.
Use a short-term forbearance to buy time and impose structure. If the borrower is cooperative, Alpert suggests considering a short-term forbearance to delay action on the default while the bank pursues its initial objectives. He’s explicit: “The forbearance is not an endorsement of the borrower’s viability, rather it is a tool to buy time and impose structure on the process.”
Require a turnaround consultant—and insist on better reporting. The consultant can help institute controls, preserve liquidity, remediate reporting, and build practical tools such as “a 13-week cash budget.”
Protect the bank legally and operationally. Forbearance terms may include collateral perfection documents, landlord lien waivers, more frequent reporting or audits, enhanced dominion of cash, and reviews of other exposures (ACH, cards). One non-negotiable in Alpert’s view: the agreement “must contain a ‘Waiver of Claims and Defenses.’”
Decide early: fixable problem—or broken trust? If the reporting failures were a deliberate effort “to obfuscate” the company’s true financial condition, treat it as an exit relationship. If they stem from “an honest managerial problem,” retention may be possible—if the issues are fixed “for good.”
