From View From The Top, Issue #33
How we resolved a contractor insolvency, a borrower default, and a winding up petition – without reaching for extend-and-pretend.
Last week I wrote about the difference between an honest loan book and a hopeful one. The dividing line, I said, is what a lender does at maturity when a loan turns. Extend the term and keep the old valuation on file. Or recognise the position and take the loss if there is one.
Several people asked me, in various ways, the same fair question: easy to say — have you actually done it and can you provide a case study?
So this week I want to tell you about the time we chose the second option, on our own book, when the first would have been far easier.
THE SET UP
In January 2021 we underwrote a development loan against a 100-unit residential scheme outside London.
On paper it was unremarkable in the best sense: an experienced sponsor with an institutional pedigree, a fixed-price design-and-build contract with an established main contractor, a 22-month term, a targeted 19.7% gross IRR. I a great city centre location. The fixed-price contract placed most of the construction risk where it’s supposed to sit — on the contractor. Strong comparables from an adjacent, largely sold-out scheme supported the values.
The kind of loan you approve and move on from.
Then the ground shifted under every developer in Britain.
A tsunami of events unfolded.
Construction material costs rose at a pace the industry hadn’t priced for. By mid-2021 the ONS construction materials index was running at close to 25% annual inflation. Timber and board products rose 60 to 80%. Structural steel rose more than 50%. Then Russia invaded Ukraine and added a second shock on top of the first — gas prices spiked several-fold, feeding directly into steel, cement, glass, haulage, everything downstream of a barrel of oil.
By mid-2022, project costs had risen by roughly £3 million. Our main contractor was carrying a fixed price signed before any of this happened. The scale and speed of the shock proved larger than the contract’s pricing — and the contractor’s own balance sheet — could bear. The contractor went into liquidation in mid-2022.
We restructured once — an increased facility, additional borrower equity, a claim on the contractor’s performance bond — and construction continued for another year with the borrower managing subcontractors directly. But by late 2023, further ongoing cost escalation combined with the borrower’s inability to inject more equity brought the site to a halt. Unpaid subcontractors began lodging claims. One issued a winding-up petition. Others quickly backed it.
A half-built building. A defaulted borrower. Third partner subcontractors running for the door. A winding-up order looming. Competing creditor claims forming a queue.
THE WORK-OUT
This is the point in the cycle where a lot of lenders reach for the quiet option. Manage expectations manage spreadsheets – delay.
Extend the loan. Capitalise the interest. Leave the original valuation on file — it’s only been a year or two. Report the loan as performing. Wait for the market, or the borrower, or someone else, to solve the problem for you.
And here is the uncomfortable truth about that option: from the outside, nobody would ever have known. The mark holds. The book stays clean. The problem compounds quietly while the reporting stays smooth. Until the clock stops and an exit is necessary.
That is exactly the industry wide problem I described last week. And this was our invitation to catch it.
WHAT WE DID INSTEAD
We didn’t wait – we worked it out. We actively managed the site to completion.
In February 2024 we appointed an administrator over the borrowing SPV — on our own initiative, before a creditor forced the issue on worse terms. The administration created a statutory moratorium over creditors, removed the defaulting borrower, and gave us direct control over the path to completion and exit, while insulating the site from further disruption by unpaid subcontractors.
We kept the professional team in place — the monitoring surveyor stepped up as project manager on a fee structure that rewarded cost savings, the civils contractor stayed to complete the external works, the quantity surveyors and site management continued. Continuity of knowledge on a live site is worth more than a clean break. A full re-tender would have added months – maybe up to 9 – and material cost risk at exactly the moment we could afford neither.
We funded and managed the scheme through to practical completion ourselves, in stages, with credit committee approval at each step and a daily completion tracker holding programme and budget to account — rather than selling a half-built building into a distressed market at a number that would have locked in a loss neither the numbers nor the asset deserved.
At the same time, we went after the parts of the loss that belonged to someone else. A claim for shared infrastructure costs that were never ours to carry alone. A professional indemnity claim against the design team.
Work-out / Recovery isn’t glamorous work and it doesn’t make for a good site visit. Most lenders won’t and cannot do it. But it’s the difference between a distress loss you crystalise and a loss you share with the parties who caused it.
THE EXIT WE REFUSED
When it came to the exit, we didn’t take the first offer either. An early bid to sell the building vacant would have locked in a negative return — We said no.
Instead we kept the exit strategy under continuous review and re-underwrote it against real market feedback at each stage. We worked with sales agents, local authorities to find the best possible outcome. We tested a corporate pre-let. We tested a block sale. When vacant-possession offers came in underwhelming and block negotiations stalled, we moved to an individual-unit lease-up — unit by unit, tenant by tenant — with a bulk letting route running in parallel.
In this market, the exit strategy is a decision you keep making, not a decision you make once at the point of default.
WHERE IT STANDS
The building was certified practically complete in October 2024 — roughly eight months after we took control. All 100 units.
It has a new name now and a lease-up campaign that is genuinely gathering pace: enquiries and viewings climbing every month, the conversion rate from viewing to offer improving steadily, the volume of agreed offers nearly doubling in the space of a fortnight. We’re in parallel discussions on a potential bulk letting alongside the private campaign.
Professional advisors values the asset at a higher stabilised basis. Senior debt is covered at roughly 37% net LTV. Current return estimates sit in the high teens IRR range, 1.20x to 1.40x MOIC — a long way from the number a distressed sale would have printed in 2023, and not far from where the loan was underwritten to land in the first place.
The recovery claims — the bond, the guarantees, the professional claims — remain active alongside the lease-up, providing additional cash flow against the incremental capital we deployed.
THE LESSON
None of this was inevitable as many will know from their own loan books. It was a choice, made repeatedly, at every point where the easier choice was to wait.
It’s worth being clear about what failed here — and what didn’t. This wasn’t a bad sponsor or a bad asset, and it wasn’t poor underwriting. The original credit paper reflected an experienced sponsor, an established fixed-price contractor, and supportive comparables. What failed was an exogenous cost shock — first Covid reopening inflation, then the war — landing on a single point of concentration: one contractor, one fixed price, no room to absorb what the world did to input costs.
That’s a lesson about concentration risk as much as anything else. Even well-underwritten development loans carry it, particularly where a scheme depends on one contractor holding a fixed price through a multi-year build.
But the recovery is the part I’d ask other lenders to sit with. Taking control early is uncomfortable. Funding a distressed scheme through to completion, rather than selling it half-finished, requires conviction, capital and experience. Chasing recoveries through bonds and guarantees is slow and unglamorous. Re-underwriting the exit three times against real market feedback is more work than fixing it once and hoping.
None of it is the easy path. The easy path was extension.
The real differentiator between a loss and a recovery was not the initial credit decision. It was the quality and speed of the workout that followed it.
HARD LANDING
Last week I wrote that discipline isn’t inherited from the collateral — it’s practiced, or it isn’t.
This is what practicing it looks like. It looks like administration papers filed on your own initiative. Daily cost trackers. Unglamorous recovery claims pursued for years. An exit re-underwritten every time the market tells you something new.
Discipline isn’t something the collateral gives you. It’s something you practice each day, each loan, usually at the exact moment it would be simpler not to.
