Addressing the financial impact of COVID-19
Credit solutions for companies with urgent cash needs
This piece from Deloitte in the UK provides guidance for companies experiencing significant operational disruption due to public policy measures put in place to contain the spread of COVID-19.
Public policy measures put in place to contain the spread of Covid-19 are resulting in significant operational disruption for many companies. Staff quarantine, supply chain failures, orphaned/unavailable inventories, and sudden reductions in demand from customers are creating serious issues for companies across a far wider range of sectors than initially anticipated.
A number of companies now face weeks, if not months, of exceptionally poor trading conditions. For most, the revenue lost in this period represents a permanent loss rather than a timing difference and is putting sudden, unanticipated pressure on working capital lines and liquidity.
Some companies are able to maintain adequate headroom by making unseasonal drawdowns on their RCFs. Others are finding that they need to approach their banks to arrange temporarily larger facilities or covenant resets/waivers. In certain cases, the scale and urgency of the funding requirement has taken the company’s management team and its bankers aback.
Reasons why companies may be having issues
Unusually, this is affecting well capitalized companies who – absent Covid-19 – would be trading profitably. However, not all these companies will be able to negotiate the facilities they need from their existing banks:
- Banks’ credit approval timescales may be too slow to deliver the necessary funding in time
- Banks may be at the limits of their risk tolerance for a single credit
- RCFs may be drawstopped due to facility/covenant limits/cross defaults
- Hastily-assembled security packages to support new funding may be ‘messy’ due to limited collateral availability
- Companies may be looking for a highly bespoke, rolling short-term facility on terms which do not naturally fit into a bank’s standard product suite.
- What is needed: Expertise in structuring collateralized and unsecured loans, and focused teams experienced in driving liquidity/cost-out initiatives and working capital improvements.
- Bespoke solutions: Covid-related financing solutions are urgent; the financings may not be standard and require expert guidance and knowledge of the special situations market
- Lean on trusted advisors: Boards and lenders need assurance that the financing requirements/downsides have been independently tested, challenged and are well understood
Questions you should ask yourselves
- How much money do we need? For how long?
- How do we slot this new money into our existing capital structure?
- Who could we borrow from? What terms can we expect?
Even for companies who have not yet been adversely affected, management teams with concerns about Covid-19 should pre-emptively seek new committed facilities (even if not drawn) as a fallback plan in case the period of disruption becomes prolonged.