Asset-backed lending funds operate in a market where speed, certainty, and collateral integrity determine returns. As competition for yield intensifies and distressed opportunities become more complex, ABL funds are increasingly reassessing how they acquire and liquidate collateral pools. Traditional bankruptcy-driven exits—especially court-supervised “fire sales”—often undermine value, extend timelines, and introduce legal uncertainty.
Out-of-court Article 9 liquidations have emerged as a practical and strategic alternative. When properly structured, they allow ABL funds to acquire distressed portfolios efficiently, preserve collateral value, and bypass the friction of the bankruptcy environment.
The Traditional Bankruptcy Problem for ABL Funds
Historically, distressed portfolio acquisitions were tied to bankruptcy proceedings. Chapter 11 or Chapter 7 processes offered judicial oversight, but they came with significant drawbacks for asset-backed lending participants.
First, bankruptcy is slow. Court calendars, creditor committees, objections, and procedural delays stretch timelines from months to years. For ABL funds, capital sitting idle erodes internal rates of return and creates opportunity costs.
Second, bankruptcy is expensive. Legal fees, trustee costs, valuation disputes, and court-mandated disclosures drain recoveries before assets ever reach a buyer. These costs disproportionately impact secured lenders whose upside is capped by collateral value.
Third, bankruptcy creates a “fire sale” environment. Assets sold under court supervision are widely marketed as distressed, attracting opportunistic buyers who discount aggressively. The stigma alone compresses pricing, even when underlying collateral quality remains strong.
For ABL funds focused on disciplined risk management, the inefficiencies of bankruptcy and the hidden costs of carrying aged B2B debt are no longer acceptable.
Understanding Out-of-Court Article 9 Liquidations
Article 9 of the Uniform Commercial Code governs secured transactions and provides secured creditors with powerful remedies upon borrower default. One of the most effective is the right to dispose of collateral outside of court, provided the process is commercially reasonable, and proper notice is given. This framework relies heavily on the role of UCC-1 verification to maintain secondary market liquidity and security.
Out-of-court Article 9 liquidations allow secured lenders—or their assignees—to take control of pledged collateral and execute a private sale, transfer, or structured disposition without filing for bankruptcy.
For ABL funds, this framework offers a legally grounded path to acquire distressed portfolios while avoiding the procedural overhead of the bankruptcy system.
Faster Acquisition of Distressed Portfolios
Speed is one of the most decisive advantages of out-of-court Article 9 liquidations.
Instead of waiting for court approval, ABL funds can transact directly with the secured party controlling the collateral. Once the default is established and Article 9 requirements are met, the liquidation process can move forward on a commercial timeline rather than a judicial one.
This acceleration benefits ABL funds in several ways:
- Capital is deployed faster, improving fund velocity
- Market conditions can be leveraged before asset values deteriorate
- Competitive bids can be avoided through negotiated transfers
In distressed markets, time often determines whether value is preserved or destroyed. Article 9 allows funds to act while collateral fundamentals are still intact.
Eliminating the “Fire Sale” Discount
Court-supervised sales almost inevitably signal distress. Even well-performing assets suffer valuation pressure when sold through bankruptcy channels.
Out-of-court Article 9 liquidations change the dynamic. Transactions can be structured as private sales or controlled auctions with limited exposure. Collateral is positioned as a secured transfer rather than a forced liquidation.
This distinction matters. Buyers evaluate assets differently when they are not part of a public bankruptcy process. The result is often stronger pricing and better alignment with intrinsic collateral value.
For ABL funds acquiring distressed portfolios, avoiding the fire sale environment directly enhances recovery potential and downside protection.
Streamlined Due Diligence
Due diligence is where Article 9 liquidations deliver some of their most tangible benefits.
In bankruptcy, diligence is fragmented. Title, lien priority, collateral scope, and enforceability are often litigated in parallel with the sale process. Buyers inherit uncertainty and post-closing risk.
Out-of-court Article 9 liquidations, when executed correctly, focus on streamlining due diligence so that collateral is vetted before transfer, not after. Lien priority is established upfront. Notice requirements, UCC filings, and security agreements are reviewed and resolved prior to closing.
For ABL funds, this means:
- Clear first-lien or defined priority positions
- Reduced risk of post-transaction challenges
- Fewer legal contingencies embedded in pricing
The result is a cleaner acquisition with risk identified and priced ex ante rather than litigated ex post.
Control Over Process and Structure
Bankruptcy removes control from secured creditors and buyers alike. Judges, trustees, and committees influence outcomes, often in ways that dilute economic logic.
Article 9 liquidations restore control to the secured side of the capital stack. ABL funds can negotiate structure, timing, and asset packaging directly with the enforcing lender.
This flexibility allows for creative solutions, such as:
- Partial portfolio acquisitions
- Staggered closings aligned with collateral realization
- Hybrid structures combining liquidation and ongoing servicing
Control over structure enables ABL funds to tailor transactions to fund mandates rather than court conventions.
Reduced Legal and Reputational Risk
Contrary to common perception, out-of-court does not mean higher legal risk. In many cases, it reduces it.
Article 9 is a well-established law that provides a predictable path, even amidst frequent regulatory changes impacting B2B debt recovery. When notice, valuation, and commercial reasonableness standards are met, courts routinely uphold these transactions. Moreover, because disputes are minimized upfront, there is often less litigation overall than in bankruptcy cases.
Reputationally, Article 9 liquidations are quieter. They avoid the public scrutiny and negative signaling associated with bankruptcy filings. For institutional ABL funds, discretion is often as valuable as return.
A Strategic Alternative, Not a Shortcut
It is important to note that out-of-court Article 9 liquidations are not a shortcut or a workaround. They require discipline, documentation, and expertise. Poorly executed processes can invite challenges.
However, when managed properly, they represent a strategic alternative to the bankruptcy environment—one that aligns better with the operational and financial realities of asset-backed lending funds.
Conclusion
As distressed opportunities evolve, so must the tools ABL funds use to pursue them. Traditional bankruptcy processes, while sometimes necessary, are increasingly misaligned with the need for speed, certainty, and value preservation.
Out-of-court Article 9 liquidations offer a proven, legally sound mechanism for acquiring distressed portfolios without the inefficiencies of the fire sale environment. They streamline due diligence, protect collateral value, and give ABL funds greater control over outcomes.
For institutional buyers and ABL funds seeking bankruptcy environment alternatives that enhance returns while reducing friction, Article 9 is becoming a core strategy in modern asset-backed lending.
– By the Golden River Global Research Team
