Private companies and COVID-19

For private companies, accessing capital can be a challenge during ordinary times. The COVID-19 pandemic, which has quickly morphed into a global humanitarian crisis and economic disaster, has dramatically upped the stakes and added a new layer of complexity. And while the quantitative easing programs initiated by governments around the world have propelled the markets to function, these efforts are likely to be of limited efficacy and will not cure what ails many beleaguered companies, particularly private enterprises.

As such, private company finance leaders should be preparing for what is likely to be a tougher credit environment and no matter where their company is on the credit spectrum, re-evaluating their capital needs to identify potential liquidity mismatches and seek to bridge the gaps.

In this paper, Deloitte Private outlines four areas of opportunity companies can consider to meet their needs, including:

Tapping COVID-19 emergency support programs

Governments around the world have unleashed a wave of targeted assistance programs meant to help sustain employers through the crisis. Finance leaders should investigate whether they qualify for these government-led programs, as tapping these reserves could help improve their cash positions, restart suspended operations, rehire employees, and fund other recovery efforts. As they consider applying for such relief, finance leaders should recognize that companies in relatively stable situations that receive public funds are subject to increasing public scrutiny.

Maintaining strong relationships with existing capital providers

While a major slowdown could mean that new loans—particularly for borrowers with weaker credit—are difficult to come by, private companies may be eligible for immediate debt support, such as interest relief or relaxing of debt covenants. Lenders are more likely to extend such relief to those with a long-term and established relationship. Even for those with a shorter track record, their chances may increase through transparent communications.

Pursuing other traditional credit opportunities

One way or another, companies need to be proactive in terms of taking advantage of any incremental capital they can raise while the low-rate environment lasts. That may be with existing lenders or other providers—do not assume that all banks and other capital providers look at the attractiveness of a situation the same. For high-yield issuers in more stable financial condition, now may be the time to lock in relatively low long-term rates to pay down short-term operating debt. But traditional credit opportunities may even still be available to those whose businesses have been hit hard by the shutdowns-so long as they act quickly.

Considering alternative funding sources

Given the relative paucity of traditional credit for many affected private companies in the middle-market space, it may be necessary to consider alternative forms of capital to get through this challenging period (e.g., private debt lenders, special situation funds). These alternative debt funding sources are allowing some companies the flexibility to avoid pursuing potentially more costly transactions in which they give up equity in the business - or sell it outright. But they do come with potential downsides that financial leaders should consider.

The COVID-19 crisis has created a level of uncertainty few private companies have ever had to face—and, by all counts, it’s unlikely to fully clear for the next several years. Now is the time to get ahead of a more troubled debt-raising environment, as the market for available capital will likely become more crowded as downgrades and defaults increase. All credit relationships need to be considered, whether they are traditional players such as banks, or alternative lenders such as private debt or private equity providers. Those enterprises with thorough contingency plans will be in a far better position to weather the storm, while those with stronger balance sheets will be primed to take advantage of dislocations within their industries and shift into higher growth mode as the recovery accelerates and the “next normal” evolves.