Ask the Workout Window: A Federally Funded Borrower Is Slipping—Now What?

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’m a relationship manager at a regional bank, and I’m seeking your expertise regarding a middle-market non-profit borrower in our portfolio, Community Impact Services (CIS). CIS is a 501(c)(3) based in the Midwest, delivering workforce development and job training programs for low-income communities. The organization generates $12 million in annual revenue, with 75% from federal grants and contracts tied to employment initiatives, 15% from state grants, and 10% from private donations. In its regional workforce development market, CIS maintains an 8% share, competing with larger national non-profits and for-profit providers. 

Two years ago, we extended a $3.36 million real estate loan to CIS to fund the expansion of its headquarters, which is now valued at $4.2 million. The loan represents an 80% loan-to-value ratio, fully amortizing over 15 years with a fixed interest rate of 6.5%—aligned with market rates at the time—and monthly principal and interest payments of approximately $29,500. The loan is secured by a first lien on the headquarters property, with no additional collateral pledged. The current outstanding balance is $3.1 million. Recently, federal budget uncertainties and delays in grant disbursements have strained CIS’s cash flow, pushing its debt service coverage ratio below 1.0x for the past two quarters. They’ve requested covenant relief and may need a broader workout plan to stay afloat. 

What workout strategies could we employ to help stabilize their finances while safeguarding the bank’s interests? I’d greatly appreciate your guidance on this complex case. 

JASON: It’s clear that CIS plays a vital role in its community and is a valued client of your bank. Restructuring a loan for a non-profit like CIS poses unique challenges: as a 501(c)(3), its loan is inherently non-recourse with no equity ownership to tap—and banks typically hesitate to foreclose due to the risk of damaging their reputation in the community. 

In today’s volatile economic and fiscal environment, CIS’s heavy reliance on federal revenue—75% of its $12 million annual income—heightens its vulnerability. Budget uncertainties and potential contract cancellations could push this borrower toward further defaults or even non-payment. Given this risk profile, I recommend three immediate steps: add the loan to your watch list, issue a covenant default and reservation-of-rights letter addressing the recent breach, and transfer the relationship to your workout team.  These actions will allow the bank to monitor the situation closely and respond quickly if CIS’s financial condition worsens.  

If CIS begins missing payments—whether on debt, payroll, or taxes—or faces overdrafts, consider downgrading the loan further or moving it to nonaccrual status. 

Your workout team should engage CIS’s management and board in a deep dive that assesses future risks. If government funding is shrinking, how will CIS replace that income? Some nonprofit providers are, by the nature of their business model, dependent on federal contracts. While a few states, local governments, and foundations are stepping in to offer short-term relief, it’s unlikely that support will fully replace federal funds.   

On the expense side, all options must be explored. With an apparent EBITDA margin of just 3% (about $360,000 on $12 million revenue), CIS operates on a razor-thin buffer. Efficiency gains are likely needed to align expenses with projected revenue. To avoid lender liability, don’t prescribe specific cuts, but suggest they evaluate expenses like staffing, overhead, or marketing. (I note your point about workforce development making staff reductions sensitive; perhaps technology or outsourcing could trim costs instead.) 

As for the default itself, tailor the approach to CIS’s balance sheet. If liquidity is strong (for example, 12 months of operating and debt service coverage) and CIS presents a credible budget showing near-term compliance, consider a forbearance agreement. Pair this with more frequent financial reporting to justify an upgrade once performance stabilizes. If liquidity is weak, leverage the default to negotiate a restructure. Given the revenue uncertainty and tight cash flow, recast the $3.1 million loan from its current 15-year amortization to a 25-year schedule, and shorten the maturity to two to three years from now. At 6.5% interest, this drops monthly payments from about $29,500 to about $20,500, freeing up about $108,000 annually. Direct most of this relief—say, $80,000—into a pledged savings account tied to a new liquidity covenant targeting a one-year debt service reserve over time. Secure additional collateral, such as a UCC lien on all business assets if available, and mandate monthly reporting and forecasts during the workout. 

If CIS’s condition worsens or management lacks the capacity for a turnaround, it may be time to pivot to an exit. With around $1 million in equity in its $4.2 million property, a sale or sale-leaseback could unlock liquidity while preserving operations. In that case, use the default to accelerate the loan’s maturity to one year from today, offering payment relief if needed, with excess cash pledged until payoff. Set clear benchmarks: broker engaged within 90 days, marketing updates or offers by 180 days, and a signed contract in hand at least 90 days before maturity. 

This approach balances CIS’s mission with the bank’s risk, offering flexibility while protecting the bank’s position. Best of luck!

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.  

Please note: Sending a Workout Window question indicates you approve of the question’s publication, without attribution to you, and its use in the development of scenarios, practices, and advice that could be included in the Workout Window or other RMA content, properties, and platforms.