Good Credit Starts With The Bad News
One of the biggest mistakes a broker can make when presenting a private credit scenario is trying to make it look cleaner than it really is.
In private credit, we don’t need a polished story.
We need the real one.
Warts and all.
If there are hairs on the scenario, we need to see all the hairs on it.
That is because good credit starts with the bad news.
We recently assessed a property acquisition scenario introduced by a broker. During our due diligence, we identified a default in a related entity. It had nothing directly to do with the borrowing entity, but when we dug deeper, we discovered there was approximately $900,000 owing to the ATO.
What had initially been presented as a relatively minor issue was clearly something much more significant.
Ultimately, we couldn’t proceed with the transaction in the required timeframe.
But the ATO debt itself was not necessarily the deal-breaker.
A plan was being developed for the related entity to enter voluntary administration and negotiate an outcome with the ATO. The expectation was that the debt could potentially be reduced substantially, possibly to around $300,000, while the borrower was simultaneously trying to settle the land acquisition.
Had that information been presented clearly from day one, the credit conversation could have been very different.
We would have been able to assess:
- the size of the problem;
- how it arose;
- the proposed strategy to deal with it;
- the advisers involved;
- the expected timeframe; and
- the steps already being taken.
That is what credit needs to see.
A problem does not automatically make a scenario unfundable.
What matters is whether the problem is understood, quantified and supported by a credible plan.
Our credit team conducts detailed research and public-record searches as part of every assessment, so material issues will generally come to light anyway.
The difference is whether the broker tells us upfront, or credit discovers it halfway through the assessment.
When a material issue is uncovered unexpectedly, credit naturally starts asking: what else don’t we know?
When the same issue is disclosed upfront, properly explained and accompanied by a plan, the conversation is completely different.
So don’t try to make a difficult scenario look perfect.
Show us the warts.
Show us the hairs.
Then show us the plan.
Because in private credit, a problem we understand is often far easier to fund than a problem we discover later.
Good credit starts with the bad news.