Most credit careers eventually involve working with credits that are going wrong. The skills are different from new origination — you're not trying to grow a business relationship, you're trying to maximise recovery on a loan that might not be repaid in full. The work is intellectually demanding and emotionally taxing; senior people often specialise here because the judgment calls are valuable.
The stages of distress
- Covenant breach: borrower trips a financial or operational covenant but is current on payments. Lender can demand a waiver fee, tighten terms, or accelerate (call the loan).
- Watchlist: lender's internal classification — credit is performing but deteriorating. Increased monitoring; quarterly visits become monthly.
- Past due: borrower misses a payment. 30 / 60 / 90 days past due are standard breakpoints.
- Default: missed payments past the grace period, often triggering acceleration of the full balance.
- Restructuring: lender and borrower negotiate new terms (longer tenor, lower coupon, sometimes a haircut on principal).
- Workout: formal recovery process involving asset sales, equity injections, partial write-offs.
- Insolvency / bankruptcy: legal proceedings under Kenya's Insolvency Act (2015) or jurisdictionally equivalent (US Chapter 11/7, UK Insolvency Act).
The workout playbook
When a loan goes sour, the lender's choices: write it off and lose; force the borrower into bankruptcy (slow, expensive, low recovery); or negotiate a restructuring. Most negotiate. The typical playbook:
- Day 1: Lender's workout team engages. Senior underwriter from origination is consulted but typically removed from active workout (conflict of interest).
- Week 1-4: Full diagnostic. Audited statements, bank statements, projections — get to the truth of the situation. Often involves a turnaround advisor.
- Month 2: Lender presents a term sheet. Common provisions: covenant reset (looser temporarily, tightening over time), maturity extension, fee for waiver, equity warrants, additional collateral or guarantees, principal haircut (sometimes).
- Month 3-6: Negotiation. Other creditors brought into the table for syndicated loans. Lawyers draft restructuring documentation.
- Beyond: Servicing under restructured terms. Failure to perform on the restructured plan typically triggers bankruptcy.
Why most distressed credits don't go to bankruptcy
In Kenya, formal insolvency proceedings under the 2015 Act average 4-6 years to resolution, with creditor recoveries typically 20-40% for unsecured and 60-80% for secured. Negotiated restructurings typically resolve in 6-12 months with recoveries of 70-90%. The math favours negotiation almost always. Bankruptcy is the threat that disciplines negotiations — most lenders prefer never to actually file.
Distressed-debt funds
A whole asset class exists to buy distressed credits at deep discounts. Apollo Distressed Credit, Oaktree, Cerberus, Davidson Kempner, and others. They buy from original lenders (banks that want to clean up balance sheets) at 30-60 cents on the dollar; they ride out the workout; they profit if recovery exceeds the price paid. The skill is being right about recovery.
Chapter 11 vs Kenya's Insolvency Act
- US Chapter 11: 'debtor in possession' — existing management stays in control during reorganisation. Court oversight. 12-24 months typical. Creditors vote on the reorganisation plan.
- US Chapter 7: liquidation — assets sold, creditors paid in priority order.
- Kenya Insolvency Act 2015: introduced an administration option (similar concept to Chapter 11 — debtor stays in control with court oversight) alongside liquidation. Better than the pre-2015 system but still slower than Anglo-American counterparts.
- Practical implication for Kenyan lenders: 'liquidation value' (likely recovery in bankruptcy) is a key input to workout negotiations — if liquidation would return 30% and the workout offer is 70%, the lender accepts the workout.
Exercise
Your bank holds a KES 800m senior secured loan to a Kenyan manufacturer. The company defaulted last month. You have first claim over the factory (valued at KES 600m on a forced-sale basis) and there's KES 200m of inventory. The borrower wants to negotiate a restructuring: 50% haircut, equity stake in lieu, 5-year extension on the remainder. Liquidation would take 3-5 years and recover ~70% of secured value after costs. Walk through your analysis — do you accept the restructuring, counter, or insist on liquidation?