The New Playbook for Distressed Asset Lending

Distressed exchanges reached a record high of 55% in 2025 according to S&P Global’s latest analysis . Repeat defaulters climbed to over 40% of all defaults.

If you are a lender or attorney, these numbers confirm what you already feel. The old playbook is broken. You are staring at a portfolio where traditional bankruptcy filings are down (but now increasing) and private debt holders dominate the exposure landscape.

You need a new approach for the next distressed situation on your desk.

This guide is for the people who have to work out the loan. It is not for investors looking to buy distressed debt at a discount. You will learn how the landscape has shifted and what your options are when a borrower stops performing. We will walk through the lender’s perspective on protecting collateral and the attorney’s perspective on structuring protections.

You will also see early warning signs in your portfolio, the path forward starts here.

What Is Distressed Asset Lending?

Distressed asset lending is financing extended to borrowers who are insolvent, illiquid or in default. It generally takes two forms. It can be new capital injected into a troubled situation, such as rescue financing or debtor-in-possession lending. It can also be existing loans that need a workout because the borrower stopped performing.

The lender’s goal is straightforward. Preserve collateral value. Minimize loss. Exit as cleanly as possible.

The attorney’s goal runs parallel. Structure protections, manage fiduciary duties and execute the legal strategy that gets the deal done.

One distinction matters here. Distressed asset lending is not the same as distressed debt investing. Investors buy debt at a discount to profit from recovery. Lenders and their counsel work from the other side of the table. You already hold the exposure and need to resolve it.

The investor asks, “What’s the upside?” The lender asks, “How do I limit the downside? “The attorney asks, “How do I protect my client while getting this resolved?”

How The Distressed Landscape Has Changed

The current cycle looks different. Traditional bankruptcy filings are down (although they recently started to climb). Distressed situations have simply taken a different form.

Distressed exchanges now dominate the resolution landscape. In Q1 2025, distressed debt exchanges accounted for 85% of loan default volume. This is up from 74% the year prior. These exchanges deliver higher recoveries than traditional bankruptcy for many lenders.

The players have changed. Private debt has grown massively since 2007. Private lenders often have different covenants and workout preferences than traditional banks. If you are used to syndicated bank debt, the dynamics with private credit holders will feel unfamiliar.

Repeat defaulters are a major factor. Over 40% of defaults in 2025 involved companies that had defaulted before. Many initial restructurings failed to address the underlying problems. The question is not just “Can we restructure this?” It is “Will this restructuring actually stick?”

Delay compounds costs. Every day a situation lingers, fines accrue and assets deteriorate. Speed is a strategy. Forbearance agreements can buy time but they must be part of a larger plan.

The Lender’s Perspective: Protecting Value

When a borrower stops performing, you face a sequence of decisions.

Assess whether the business is recoverable or terminal. Some situations involve sound operations hitting a temporary wall. Others involve businesses with no viable path. The answer shapes everything that follows.
Evaluate collateral position. Understand exactly what you hold. Determine what the collateral is worth in a forced sale. Map out the priority stack of secured versus unsecured exposure.
Decide on the path forward. Your options typically include:

Forbearance: Buys time but rarely solves the core issue.
Out-of-court restructuring: Preserves value but requires cooperation.
Receivership: Provides control but involves court oversight.
Foreclosure: Definitive but may destroy value.

Engage professionals who operate. You need professionals who can run the business day-to-day. Amplēo T&R’s work with a $55M working capital line on a distressed dairy operation illustrates this. The lender engaged Amplēo T&R for execution. The result was an 85% pay down of the working capital line and a return to performing status.

Amplēo T&R provides Turnaround & Restructuring Services designed for lenders. This includes receiver or trustee services, Chief Restructuring Officer placements and collateral preservation.

The Attorney’s Perspective: Structuring Protections

Legal strategy is only half the battle. Operational execution determines if the value you are protecting survives. The best legal structure will not save a deal if the business deteriorates while paperwork gets finalized.

Attorneys need partners who understand the operational realities of a distressed company. Key considerations include:

Liability protections: Especially in receivership situations where state statutes may lack built-in shields.
Fee structures: Ensuring incentives align with recovery.
Stakeholder management: balancing competing interests.
Court credibility: Courts trust professionals who have been appointed as fiduciaries before.

Amplēo T&R provides services for attorneys including litigation support, forensic accounting and claims administration. For a deeper look, read why operational turnarounds matter to legal strategy.

What You Can Do With This Information

Distressed exchanges dominate resolution paths and repeat defaults are climbing.

If you are a lender: Evaluate your distressed exposure against the factors described above. Determine if you are looking at a recoverable situation or a terminal one.

If you are an attorney: Ensure your client has operational support alongside legal strategy. Do not let the business deteriorate while you finalize the structure.

If you are unsure: Engage a turnaround professional now. Amplēo T&R serves as court-appointed fiduciaries in all 50 states.

For additional guidance, explore these crisis management strategies .

Meet with a turnaround expert today!

FAQ

1. What is distressed asset lending?

Distressed asset lending refers to financing extended to borrowers who are insolvent, illiquid, or in default. This includes both new rescue capital and existing loans requiring workout, where lenders focus primarily on limiting downside risk and preserving collateral value rather than seeking upside profit.

2. How has the distressed loan market changed in recent years?

The distressed market has shifted in several notable ways. Industry observers have noted that traditional bankruptcy filings have declined while distressed exchanges have become a more common resolution method. Private debt holders now represent a larger share of exposure, and repeat defaulters have become a more significant factor in market dynamics.

3. What resolution options do lenders have when borrowers stop performing?

Lenders can pursue several resolution paths:

Forbearance to buy time
Out-of-court restructuring to preserve value through cooperation
Receivership for court-supervised control
Foreclosure as a definitive but potentially value-destroying option

The right path depends on whether the business is recoverable or terminal and the strength of the collateral position.

4. When should turnaround professionals be engaged in a distressed situation?

Early engagement preserves more options. Every day a distressed situation lingers, fines accrue, assets deteriorate, and options narrow. The single most important principle in distressed situations is that earlier involvement creates more paths to resolution.

5. What should you look for when selecting turnaround professionals?

Key criteria include:

Operational capability rather than just advisory expertise
Court credibility through prior fiduciary appointments
Speed of execution
Full continuum coverage from turnaround through liquidation

You need professionals who can operate the business, not just advise on it.

6. Why is operational support critical in distressed workouts?

The best legal structure won’t save a deal if the business deteriorates while paperwork gets finalized. Attorneys must balance legal strategy with operational execution because legal protections alone cannot preserve value if day-to-day operations collapse during the restructuring process.

7. How do lender and investor perspectives differ in distressed situations?

Investors ask about upside potential, while lenders ask how to limit downside risk. Attorneys focus on protecting their client while achieving resolution. This fundamental difference in perspective shapes strategy, with lenders prioritizing collateral preservation over profit maximization.