Covenants, Collaboration and Capital: A Deep Dive into Subordinate Debt

Rita Garwood: In the current credit cycle, we’re seeing senior lenders tighten advance rates. Where exactly is the structural friction occurring in the capital stack right now? How is your company stepping in to bridge that gap, and what should ABL lenders understand about having you in a deal alongside them?

Joe Camberato: We pride ourselves on funding companies for bridge and growth opportunities. In the last six to 12 months, you’ve seen lenders tightening up as businesses go through a re-stabilization period. We find success working with ABLs and other senior lenders by coming in as over-advanced, junior capital, or subordinated debt. We provide the working capital needed to keep a business moving when a current senior lender is at max capacity—often because a business needs to move fast on inventory or an acquisition.

Garwood: How would you differentiate National Business Capital’s subordinate product from traditional mezzanine? Are you seeing it used more as permanent capital or as high-velocity bridge for specific milestones?

Camberato: We’re a “mez alternative”. What makes us different is we don’t require equity, we don’t have aggressive covenants, and we don’t have revenue kickers. Traditional mezzanine can be restrictive and expensive once you add in the equity dilution. We are a high-velocity bridge. While we have clients who have been with us for 10 years, they use us for unique opportunities, pay us off, and return when the next one shows up.

Garwood: How do you approach sponsor-backed deals differently from non-sponsored transactions? How does that shape the way that you underwrite and price subordinate risk?

Camberato: To be honest, it doesn’t actually matter to us. A strong sponsor with a great track record helps, but we underwrite what is happening right now in the business. We look at cash flow and current opportunities rather than lending solely based on projections. Whether someone is sponsor-backed or not doesn’t necessarily change our decision-making.

Garwood: ABL lenders are famously protective of their collateral. When you’re entering a capital stack behind a senior asset-based lender, how do you navigate that relationship and the intercreditor agreement?

Camberato: It comes down to getting everyone on a call to understand their concerns. I don’t believe in “legal ping-pong” or redlining agreements to death. We want the senior lender to be happy and comfortable. Often, these intercreditor agreements are favorable to the senior lender, and we’re okay with that because if they have an issue, it creates a challenge for us.

Garwood: If a dealmaker is looking at a stuck transaction today because the senior lender won’t stretch, what is the first thing they should communicate to you?

Camberato: We want to understand the need for capital and what they are trying to accomplish. Do they understand the ROI of the opportunity? If they are confident that additional capital will help them execute their goals, that’s the core of how we look at a deal.

Garwood: How can a specialty finance professional use your company to keep a client bankable when they’ve outgrown their current senior covenants?

Camberato: We bring value by allowing the client to stay where they are if they have great terms but need an over-advance the bank can’t provide. For example, if we fund an inventory purchase, that eventually kicks up the Accounts Receivable (AR), which might actually allow the bank to increase the senior line later. It becomes a win for the bank, the client, and us.

Garwood: For turnaround professionals, how does your capital function in an early distress scenario—the “yellow zone”?

Camberato: Those are case-by-case. We need to understand what went wrong, what is being done to fix it, and if there is a clear path forward. We look for stabilized cash flow. The last thing we want to do is trigger a technical default that pisses off the senior lender and hurts the business.

Garwood: How would you compare your speed to underwrite and price subordinate risk to that of a traditional mezzanine fund?

Camberato: We are extremely fast. We’ve invested heavily in technology and have a dedicated processing department. We recently funded an $8 million subordinated deal in one week. We were looped in on a Friday night, did a site visit by Wednesday, and funded on Friday. Typically, we can underwrite in five to 10 business days.

Garwood: How are you and your private equity partners evaluating the hurdle rate for sub debt? Is the focus shifting more toward cash flow coverage or enterprise value?

Camberato: We always focus on cash flow coverage. Enterprise value matters to the private equity partners, but for us, we want to be sure the business can cover the debt today. Unless it’s an acquisition where we’re underwriting the combined new cash flow, we want the stand-alone coverage to make sense.

Garwood: As you look to the second half of 2026, do you anticipate capital stacks becoming more fragmented or more consolidated?

Camberato: The word that comes to mind is collaboration. In 18 years, I’ve never seen more collaboration between multiple lenders and private equity. The old-school approach of working with just one lender is difficult in an environment where things change so quickly. Borrowers are realizing they need to pull in the right lender for the specific need at that time.

Garwood: What is the one thing the audience would most misunderstand about where subordinate debt actually fits into a deal?

Camberato: That you have to be open-minded. Not all finance groups are alike. In this market, trying to find a “picture-perfect” deal is challenging. Subordinate debt can help get deals across the finish line that you might otherwise have to walk away from. If you put the client first and stay open to unique solutions, that’s how complicated transactions get done.