Eugene F.Collins - (Re) Open for Business – Approaching your Lender on the path to recovery

In March 2020, the Irish State was blindsided by the COVID-19 global pandemic resulting in a national residential lockdown and a near cessation of domestic commerce. The Government and the Central Bank of Ireland (CBI) galvanised into action and a near €7bn package of emergency legislation and fiscal measures ensued to guide and cushion Irish businesses and their employees through these unprecedented and tumultuous times.

As our Government begins to move from crisis management towards planning for recovery and a staged process of reopening the economy, we have set out below some of the key considerations for businesses planning on approaching their existing relationship lenders in order to seek an increase or restructuring of their existing banking facilities.

Quality of Information

Notwithstanding the ostensible commitment of the five main retail banks in Ireland to support their customers through the pandemic, we are and have been since 2008, living in an era of tight regulatory scrutiny and intricate credit approval processes within our retail banks.

Despite the introduction of various regulatory measures to alleviate restrictions on the ability of our banks to provide liquidity such as the waiver of the Counter Cyclical Capital Buffer by the CBI, the deferral by the Minister for Finance of the Systemic Risk Buffer and the introduction by the ECB of supervisory flexibility regarding the treatment of non-performing loans, lenders are being faced with extraordinary demands on their liquidity with corporate borrowers either drawing down existing working capital facilities in their entirety or seeking additional funding through increases to their existing commitments.

Against this competitive background, the onus is on borrowers seeking enhanced support from their lenders to get their house in order in a comprehensive, communicative and proactive manner. Lenders and their credit committees favour clarity, data and communication. There has never been a better time to overdeliver on information.

Clear identification of needs

At this stage, most leveraged businesses have likely already been given short-term EBITDA related covenant waivers and repayment holidays by their relationship banks. However, moving towards the medium term, consideration should be given by borrowers as to whether refinancing of their facilities in their entirety, permanently adjusting covenants and interest rates would be a viable solution.

With the benefit of hindsight, future financial needs should be considered in intricate terms. In addition to the review of prospective cash flow and the identification of mitigating actions, borrowers should consider whether existing term facilities could be supplemented with more flexible arrangements in the form of revolving lines or other back-stop facilities. Consideration should be given as to whether current representation and covenant packages are viable in the medium to long term or whether additional flexibility is needed for example to support diversification of the business or product lines in response to consumer demand or a change in consumer behaviour as a result of the pandemic. Further thought should be given to requesting additional reliefs in terms of additional carveouts, grace periods or equity cures.

A banks response to a refinancing request will turn on the nature of the business concerned and its sectoral economic prognosis in general. However, in specific terms and of equal importance will be the performance of the business immediately prior to COVID-19, the willingness of third party equity or subordinated debt investors to sustain or increase their investment and the availability and analysis of financial data indicating the ability of the business to bounce back after the pandemic. Business information packages incorporating short, medium and long-term sustainable solutions to the impact of the pandemic and the financial impact of any proposed business or operational change will need to be produced.

Business Continuity and dedicated re-opening teams

An event of this scale has not occurred in living memory and few, if any, businesses contemplated the impact it would or could have on their revenues. Business continuity plans in place as at mid-March of this year have been torn up and re-written. Lenders will expect new plans to be comprehensive and flexible as the situation rapidly evolves both domestically and internationally.

If they have not done so already, borrowers should consider setting up a dedicated team to take responsibility for managing the re-opening process including the continual assessment of the applicability of various Government schemes such as the COVID-19 Working Capital Scheme or the COVID-19 Credit Guarantee Scheme and other initiatives as they evolve in scope as well as the assessment of the impact of new Government health and safety guidelines on the business. Of key importance to any lender, will be its assessment of the measures which a borrower is implementing, other than seeking additional debt, to protect its business.

Cost of re-opening

The Irish government has released guidelines to employers regarding health and safety protocols which need to be in place prior to the reopening of commercial office and retail businesses. In addition to the cost of physical distancing measures such as new signage, perspex screens, sanitation stations and the reconfiguration of office space, businesses will need to consider other matters such as the cost of prolonged absenteeism of key staff due to illness and/or self-isolation, health and safety training, IT enhancement to cater for a surge in remote working as well as backup arrangements for key staff in critical areas.

In addition, some city centre businesses may have to adjust to cater for the pedestrianisation of certain zones by local Government in response to the pandemic and they will need consider how to best position their business in order to take advantage of increased footfall or, indeed, depending on the nature of the business, alleviate the negative impact of pedestrianisation.

In the case of SMES, the COVID-19 Working Capital Scheme may be available in order to alleviate the cost of reopening post lock-down.

Ability to manage third party contractual risks

Ongoing evaluation of potential implications for supply chain contracts is key. How is COVID-19 affecting the ability of the borrower to perform its contractual obligations in both domestic and international markets? And how resilient to insolvency are its key-suppliers? If there are concerns, then consider finding alternative suppliers.

How resilient are the key customers of the business? If they have taken payment breaks, are they now able to resume? Alternatively, can a renewed and vigorous focus be applied to collecting arrears? Does the business plan incorporate a focus on international markets accounting for the specifics of the COVID-19 restrictions within those markets and the timetable for lifting them?

Building strong relationships and maintaining open lines of communication with key suppliers and customers is essential.

Ability to manage cash flows through third party avenues

The revenue of businesses in all but a very limited number of spheres will have dropped dramatically since early to mid-March. In some sectors such as hotel and travel industry, revenues will have completely ceased.

With the consent of its existing lenders, a borrower could look to increase external investment or subordinated debt in the medium- long term. Obtaining new liquidity (assuming debt service capability) or alleviating the strain on existing liquidity through these avenues may alleviate the risk to the company’s relationship bank in meeting 100% of its requirements therefore making their continued support of its business a more viable prospect.

For further information please contact Libby Garvey, Partner and Head of Banking or another member of the Banking team at Eugene F Collins.

For more information on Covid-19 related insights, visit https://www.efc.ie/covid-19/

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