Ask the Workout Window: Seeking Clarity as A Borrower Struggles With Tariff Uncertainty
6/27/2025
In each issue of The RMA Journal, veteran workout leader Jason Alpert gives advice on thorny workout challenges. Have a challenge you would like Jason to address? Send your question to WorkoutWindow@rmahq.org.
QUESTION: I have a $50 million revenue B2B customer that manufactures specialty components used by U.S. producers of small consumer products. The company struggled with a significant sales slowdown in 2024 due to weaker consumer demand, which has already strained liquidity and pressured margins (they did manage to pass their fixed-coverage charge ratio, just barely). We currently have a $12 million revolver and a $5 million equipment term loan in place.
Earlier this year, anticipating potential new tariffs (with the proposed 10% universal tariff on imports), they front-loaded raw materials from Southeast Asia and Europe. This move has pushed them into an overadvance on their inventory borrowing base, and they’ve also stretched payments to key domestic suppliers to manage cash flow. My credit officer is already concerned about the overadvance.
To complicate matters further, their smaller B2B customers—many of whom are facing their own end-market weakness—have started stretching payments, which has left about $1 million of their accounts receivable (A/R) now excluded from the borrowing base due to aging over 90 days past due. This has contributed to additional liquidity pressure.
If consumer demand remains weak through the second half of the year, they may not be able to sell through their current inventory at the planned volumes or margins—which would put even more stress on their borrowing base and cash flow position.
What should we be doing now to manage through this increasingly complex situation—both in terms of monitoring key risk signals and proactively working with the borrower—before we face a deeper problem with the revolver, borrowing base, or their supplier and customer relationships?
JASON: Based on the fact pattern laid out, this customer is certainly distressed and should be downgraded to at least “special mention grade,” with a concurrent transfer to your bank’s workout group. The customer is facing both short-term and long-term issues that must be addressed, and your bank needs to engage proactively.
Short-term: The bank needs to immediately engage with the customer and issue a default letter based on the overadvance on the borrowing base. Given that the default letter is just being issued, it may be too early—and the bank may not yet have enough information—to determine whether to keep the facility fully open and allow the borrower to draw it up and down as current assets are converted to cash.
Concurrently with the issuance of the default letter, you should inform the customer that the account is being transferred to workout, and request any missing or supplemental financial information that will help clarify the borrower’s current condition.
Long-term: The customer may be facing a potential double whammy—a slowdown in revenue due to reduced consumer demand for their end products, and rising costs of goods sold due to the proposed 10% universal tariff (which affects their raw materials and component parts).
While it is too early to tell whether the consumer pullback and tariff policies will prove long-lasting, the borrower is currently overleveraged and should be taking proactive steps to strengthen their balance sheet and maintain flexibility to survive through a possible recession.
Assuming bank management would like to maintain the relationship, and the borrower remains cooperative in providing current financials and pro formas, the bank should consider offering a short-term forbearance to allow time to assess the situation and craft a longer-term solution.
As part of the forbearance, the borrower should formally acknowledge all defaults and provide waiver of claims/lender liability protections to the bank. The forbearance period should also be used to obtain updated field exams and appraisals of any real estate and other valuable assets supporting the debt.
In addition, the bank should consider requiring the borrower to engage a qualified turnaround consultant who can help stabilize top-line revenue, drive efficiencies on the expense side of the P&L, and improve cash flow through the business. The turnaround consultant should be tasked with preparing a realistic plan and supporting documentation that the bank can use to evaluate potential restructuring of the debt. They additionally can help the customer navigate the unexpected challenges that arise in the current uncertain market.
Many borrowers and lenders are understandably focused on the cost implications of tariffs—but another, even more immediate concern is emerging: the availability of the goods and components borrowers need to operate. Supply Chain Today notes that in addition to driving up costs for importers, tariffs “can disrupt the flow of goods,” leading to “delays, stockouts, or longer lead times.”
If the bank’s loans are not already cross-defaulted or cross-collateralized, the forbearance period is also the time to address this. The bank should also consider seeking any additional credit enhancements or a paydown, particularly if the borrower has an equity sponsor with sufficient wherewithal.
Assuming the turnaround plan demonstrates that the borrower is preserving liquidity and making the necessary adjustments to the business, the bank should consider addressing the overadvance in the following manner:
- Bifurcate the revolving line of credit (RLOC) facility, rightsizing the open revolver to match eligible and lendable working capital assets. If advance rates were too aggressive at origination, now is the time to adjust them to more conservative levels.
- Term out the over advance—and any additional amounts exceeding the new collateral base—in a new amortizing facility (typically 5–10 years), structured so that payments are sustainable for the borrower. A good rule of thumb: the longer the amortization, the shorter the forbearance duration. This new term loan should be collateralized with real estate and all bank loans should be cross-collateralized.
- As part of the global restructure, implement enhanced financial reporting requirements and performance covenants tied to the turnaround plan. Any new defaults must be promptly addressed and the long-term designation of the credit as a retain/exit customer revisited.
Handled thoughtfully, situations like this can give the bank and borrower a chance to reset the relationship, restructure the debt, and position the company to survive a tougher economic cycle.
Jason Alpert is managing partner at Castlebar Holdings, a distressed debt fund and financial institution advisor. Jason led and managed workout and special asset teams at major financial institutions for two decades. He is on the editorial advisory board of The RMA Journal and is an adjunct professor at the University of Tampa. Email Jason at jason@castlebarholdings.com or reach out to him at 813-293-5766.
Disclaimer: The Workout Window is not intended nor is it to be considered legal advice. As The Workout Window stresses, consult with legal counsel and your institution’s management to be sure you are acting within the parameters of your institution’s policies and banking law.
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