From View From The Top, Issue #34
Seven lessons from a workout — written down in a quiet week
It’s mid-July. Half the market is out of office and the other half is pretending to be. I’m at my desk in London — this year’s summer is shorter breaks and more running back and forth. Some years are like that. The ones where things are being built.
But quiet weeks are good thinking weeks. And I’ve spent this one thinking about the response to last week’s issue. Hopefully next week I’lld be on a beach and will have more time to think about things more simple.
Last weeks newsletter was the case study — a development loan that went through contractor insolvency, borrower default, and a winding-up petition before coming out the other side at a positive return — generated more replies than anything we’ve published. And underneath the responses was one question, asked a dozen different ways:
What did you actually learn?
That’s a fair question and here’s the honest answer — the rules we now underwrite and manage by, learned at full price.
RULE ONE — FIXED-PRICE CONTRACTS DON’T FIX WHAT YOU THINK THEY FIX
The loan in that case study was protected, on paper, by a fixed-price design-and-build contract. Construction cost risk sat with the contractor. That is the entire point of the structure.
And it worked — right up until the shock was bigger than the contractor’s balance sheet.
A fixed price is only as strong as the company holding it. When materials inflation ran to 25% annually and timber rose 60 to 80%, the contract didn’t absorb the risk. It concentrated it — inside a business that then failed, handing us back all the risk at the worst possible moment, plus an insolvency.
The lesson: a fixed-price contract transfers cost risk only up to the contractor’s capacity to bear it. Underwrite the contractor’s covenant as seriously as the borrower’s. Beyond that capacity, the risk is still yours — you just can’t see it.
RULE TWO — ONE CONTRACTOR IS ONE POINT OF FAILURE. PRICE IT THAT WAY
The scheme depended on a single main contractor holding a single fixed price through a multi-year build across two macro shocks.
No sensible credit officer would accept a loan book with one borrower. Yet development lending routinely accepts schemes with one contractor — a concentration just as absolute, and less visible because it sits one layer down.
Concentration risk doesn’t disappear because it’s contractual rather than financial. Now we ask on every deal: what happens to this loan if the main contractor fails on day 400? If the answer is “crisis,” the pricing and structure need to reflect that from day one.
RULE THREE — ACT BEFORE THE CREDITORS DO
When the site stalled and a subcontractor issued a winding-up petition, we had a choice: respond to events, or get ahead of them.
We took the decision and appointed an administrator on our own initiative — before a winding-up order forced the issue on someone else’s timetable and someone else’s terms. That single decision preserved control of the site, froze the creditor scramble, and protected value that a disorderly liquidation would have destroyed within weeks.
Distress rewards the first mover. The lender who waits to see how things develop is the lender who ends up negotiating from the back of the queue and back foot.
RULE FOUR — CONTINUITY BEATS THE CLEAN BREAK
The instinct in a workout is to clear the decks — new team, new contractor, fresh start. We did the opposite. The monitoring surveyor became the project manager. The civils contractor stayed. The site management stayed. The knowledge of that specific building — its quirks, its half-finished packages, its real costs — stayed on site.
A full re-tender would have added months and re-priced every risk at distressed rates. Continuity of knowledge on a live site is worth more than the satisfaction of a clean break. Fire the structure, keep the people.
RULE FIVE — FUND FORWARD WHEN THE MATHS SAY SO
The uncomfortable decision everyone faces is committing million pounds of additional capital to a scheme that had already gone wrong.
But the numbers are normally unambiguous: selling half-built meant locking in roughly a negative IRR. Funding to completion — even with real cost risk — created the option value that eventually produced a positive return.
Good money after bad is a cliché, not an analysis. Sometimes the incremental capital is the only thing standing between a recoverable position and a guaranteed loss. Run the maths on both paths honestly, then have the conviction to act on what they say.
RULE SIX — RE-UNDERWRITE THE EXIT EVERY TIME THE MARKET SPEAKS
We changed exit strategy three times. Vacant sale — rejected when the bids came in distressed. Block sale and corporate pre-let — tested, and abandoned when the real numbers disappointed. Individual lease-up — chosen because the market told us that’s where the value was.
The exit you choose at the point of default should never survive contact with the market unchanged. Fixing the exit early feels decisive. It’s actually just premature. The discipline is holding the destination — full recovery — while staying completely flexible on the route.
RULE SEVEN — CHASE EVERY POUND THAT BELONGS TO SOMEONE ELSE
The performance bond. The personal guarantees. The infrastructure cost claim. The professional indemnity claim against the design team.
None of it is glamorous. All of it is slow. And together it materially changes the recovery arithmetic — the difference between a loss you absorb entirely and a loss you share with the parties who caused it.
Workouts have two engines: the asset and the claims. Most lenders run only the first.
WHY THIS MATTERS BEYOND ONE LOAN
Here’s the part that goes beyond our book.
Britain is short 6.5 million homes. The developers who will close that gap — the SME and regional builders delivering 20, 50, 100 units at a time — depend almost entirely on specialist lenders, because the clearing banks left this market in 2008 and never came back.
And specialist lenders only stay in the market if they can survive its bad moments.
Every lender that gets a workout wrong retreats. Every retreat shrinks the funding pool. Every shrinkage means fewer schemes financed, fewer homes built, and a wider gap. The 2022-2024 cost shock pushed several lenders out of development finance entirely — not because the demand disappeared, but because they couldn’t manage distress when it arrived.
Workout competence isn’t just credit discipline. It’s market infrastructure. It’s what allows capital to keep flowing to the people who build — through the cycle, not just at the top of it.
WHERE TECHNOLOGY TAKES THE FRICTION OUT
One more observation from living through this workout — and it connects to the thread we’ve been building since Issue 30.
Almost every painful moment in a workout is, underneath, an information problem.
The valuation that’s eighteen months stale. The cost data scattered across the contractor, the QS, the monitoring surveyor, and the lender — in four formats that don’t reconcile. The weeks lost reconstructing a true position on a site before anyone can decide anything. The early warning signs that existed in someone’s spreadsheet but never reached a credit committee.
Our daily completion tracker — a deliberately simple discipline — did more for that workout than any single structural protection, because it gave everyone the same truth at the same time.
Now imagine that as infrastructure rather than improvisation. Live cost data flowing from site to lender. Valuations refreshed against real transaction evidence instead of anniversaries. Covenant positions recalculated continuously rather than at quarterly reviews. Distress signals surfacing months earlier, when the menu of options is still long.mThe connected ecosystem we described in View Issue 30 isn’t just about faster origination. It’s about seeing trouble while it’s still cheap to fix.
HARD LANDING
Every lender in this market will eventually face the moment we faced: the site stalled, the borrower gone, the petition filed.
The market forgives losses. It has seen losses before. What it doesn’t forgive — what allocators, back leverage providers, and borrowers all quietly track — is a lender who came through distress with nothing to show for it. No playbook. No rules. No evidence of having learned at full price.
We paid for these seven lessons once.
The return on that tuition is every loan we’ve written since.
