07/04/2020 For borrowers and lenders alike, there is an atmosphere of confusion during these uncertain times. Banks are waiting to hear back from borrowers on the impact the crisis has had on their activities. Companies are expecting banks and other institutions to help them get through this rough patch through necessary measures.
In this wait-and-see period, where communication is abundant despite having limited communication tools due to remote working, taking a step back does not seem to be an obvious solution. And yet, that is likely the best solution.
INCREASED BANK SOLICITATION IS TO BE EXPECTED
Economic and financial organisations have been displaying solidarity in recent days, which could make it possible to get through the first weeks and months of this crisis with as little damage as possible. Even if we all hope that this will be a short-term crisis, it will still have long-term consequences that could result in the breakdown of financial metrics, and therefore, the commitments already made to banks.
Many companies will find themselves in default, and we can anticipate a wave of renegotiations to come, which will lead to the over-solicitation of banks.
With a large volume of applications, it is likely that banks will be very selective about the ones they choose to manage. Obviously, their selection techniques will benefit the best credit profiles, but only for those who hold equivalent risk with the creditor. This means the balance will tilt in favour of more well-prepared applications that demonstrate a certain level of risk management.
PREPARE FOR AMENDMENT NEGOTIATION AND SUBSEQUENT COMMUNICATION
The first task is to identify the elements that will be subject to negotiation, if necessary. This involves an in-depth review of credit contracts and identification of risk clauses, followed by a report on the projected activity that has been adjusted for impacts due to the present crisis. This revised budget will make it possible to project the ratios and metrics that are subject to financial covenants, as well as other commitments in the credit documentation. Obviously, these projections will evolve given the current economic uncertainty but they will nevertheless provide direction and an estimate as to which commitments might not be met.
Few organisations will be spared by the Covid-19 crisis and broken financial covenants will be rife. The challenge will then be to anticipate creditor demands and prepare feedback on identified risk factors and the risk management measures that have been executed. No one is asking that these measures completely curtail the crisis, but that they demonstrate that financial consequences are at least identified and closely monitored, even if they are difficult to measure.
This type of follow-up could be a reassuring form of communication, making it possible to positively stand out amongst the substantial number of requests.
WHO SHOULD I RENEGOTIATE WITH?
In the case of a club deal or syndicated loan, the loan officer will be the main point of contact for the borrower, and it is through this individual that all background work will be carried out. However, amendments will require the majority approval of all lenders. If the opinion of the pool can be requested by the agent, it is strongly recommended that the borrower communicate personally with all banks so that concluding messages are managed and a close relationship is maintained; all of which are appreciated in times of unrest.
However, it is important to be careful because the company's banking representative is not necessarily aware of the bank's comprehensive risk policy, which probably evolves daily at the highest level and certainly does not travel at the same speed to all levels of the bank. You must, therefore, be cautious about the information you might receive.
We can also anticipate that a significant amount of bank liabilities will be sold on the secondary market. Beware of rights and obligations clauses assigned by lenders. It is highly recommended to verify that, under the credit agreement, an existing lender cannot assign its rights and obligations to a bank or third-party fund without the borrower's consent. If this is not the case, we recommend that you be vigilant about the bank's intentions around assigning some of its liabilities.
WHAT ABOUT FINANCING THAT WAS ALREADY IN NEGOTIATION?
Those who have already gone to the credit committee may suffer from activity slowdown and the unavailability of lawyers and bankers to conclude signing, but remote electronic signature solutions can be explored.
As for funding that should have gone through the credit committee, the outcome will depend on many factors as risk policies vary from bank to bank. For instance, some sectors are more impacted than others and will suffer from bank reluctance. Or the type of financing can have a consequence, since creditors will tend to favour the financing necessary for business continuity such as WCR financing or CAPEX financing.
Uncertainty is the main obstacle to financial decision making in the present moment. You can limit future uncertainties as much as possible by implementing monitoring and projection tools, anticipating consequences via detailed knowledge of current and future commitments, and by being proactive with requests from financial partners and practicing fair communication.