Adressing the financial impact of Covid-19

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 capitalised 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 time scales 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

Where we can help

What is needed

Expertise in structuring collateralised 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 yourself

How much money do we need? For how long?

• Reforecast trading and cash flows. Revised assumptions, forecasts and cashflows will be required, and also some downside scenarios, given the current number of unknowns, to help your prospective funders understand actual/potential financing needs.
• Take rapid action around working capital. Prospective funders will expect you to have already done what you can to improve cash flow by optimising working capital and identifying ‘quick win’ self-help measures to deliver rapid, tangible cashflow benefits.
• Cost-out measures. Similarly, prospective funders will expect you to have identified and be implementing urgent actions to preserve cash in the short and medium term.

How do we slot this new money into our existing capital structure?

• Review existing facility/intercreditor documentation (analyse borrowing capacity within existing baskets, etc).
• Identify potential sources of collateral for additional borrowing (property; inventory; receivables; other unencumbered assets; unrestricted subsidiaries).
• Value transfer. Explore innovative ways of carving out collateral to support new financing.
• Seek consents ASAP if needed. If your current financing arrangements prohibit super-senior financing or the offering of collateral or second liens on pledged assets, you may need to prepare a consent request.

Who could we borrow from? What terms can we expect?

• Incumbent lenders. For most companies, this will be the best starting point. Deloitte can help you to quickly formulate a request for support from your existing stakeholders, using our experience to accelerate the process and maximise the chances of success.
• Special situations funds. Using our knowledge of your business and the fund community, we can match your particular needs to one or more specialist funds who are well known to us and can deploy capital flexibly and creatively at short notice. We have access to over 200+banks, private credit funds, family offices and institutional lenders, but for this initiative are working with a small number of financing providers to produce credit solution term sheets with appropriate terms, conditions and costs to support rapid capital raising.

Combating COVID-19 with resilience

Visit our Global Covid 19-page to find more content on combating COVID-19 with resilience. This page brings together Global Deloitte insights to help businesses manage and mitigate the risk.

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