Q: How does a direct lender deal with underperforming companies?

— RIA, Upper Midwest Region

A: It is important to be the lead (control) lender. This allows for proactive monitoring and, if needed, managing, of portfolio company underperformance. Direct lenders with low losses follow three core tenets: be early, be smart and be flexible.

• Be early: Lead (control) position provides direct access to portfolio company management and financial sponsors. Lead lenders can identify potential issues early on and, if needed, lead a restructuring process. Once in place, the lead position is supported through ongoing portfolio management and monitoring.
   
• Be smart: Lead lenders have unique access to key stakeholders and portfolio company information, allowing for active monitoring through reporting requirements, robust covenant packages and board observation rights. This is reinforced by a large and diversified platform, providing access to data and information across industries and different business models.
   
• Be flexible: Established direct lenders seek a “custom fit” solution that matches the unique circumstances of every individual investment and industry. Scale, breadth and depth of resources, along with a deep capital base, allows for flexibility in approach. Furthermore, a dedicated team brings expertise in the in-court / out-of-court restructuring process, sale processes, and, when necessary, ownership of businesses across a variety of different industries.

Lead lenders have the highest frequency of and most direct access to the management and financial sponsors. Leveraging this is critical to identifying credit quality deterioration well in advance of an actual issue. By utilizing a proactive, smart and flexible approach, losses can be minimized, or recoveries can be maximized, in workout situations.