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Coronavirus: financing arrangements

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Since the Global Financial Crisis, we have been living in an era of unprecedented low-interest rates and available liquidity, with a significant diversification of types of lenders and financing products.

A significant proportion of businesses now rely on debt finance, whether to leverage up returns to shareholders or to manage cashflow and operations in markets where competition is increasing and margins are narrowing.

Against this backdrop of reliance on debt finance, the impact of coronavirus on businesses may be stark. Unlike the GFC where a combination of financial engineering and aggressive mortgage sales led to a systemic issue, it seems unlikely that there will be any sectors that remain untouched by the impacts of the virus and the measures implemented to contain it.

Consumer businesses will bear the brunt with high street retail and casual dining being two sectors that that were already experiencing significant headwinds but even online retail and the large supermarkets face potential for disruption in the event that there is damage to their supply chain.

Government announcement

The Government has announced a package of measure to support businesses, particularly in the Hospitality and Retail sectors. This includes rates holidays and grants, while loan guarantees and loans will be made available to businesses. This should assist firms in managing initial liquidity challenged and the Government has expressed willingness to go further as required.

It is expected that banks will be supportive with mortgage holidays being made available to people who need help. This approach could be expected to extend into commercial lending as well and it would seem unlikely that banks would take precipitate action to enforce debts for breached covenants of missed payments. The ability to provide such flexibility may, however, vary across the spectrum of lenders, with smaller lenders possibly less able to provide flexibility than larger banks.

Even with these measures, directors will need to ensure that they are properly discharging their duties. This will mean bearing in mind the long-term outcomes for creditors and for the nature of their business, which make take time to return or never return in the same form or scale. Government loans may be on favourable terms but will ultimately need to be repaid. 

There a myriad of financial products now available, with an increase in the number and size of asset-based lenders, debt funds. This can allow any new or replacement financing to be tailored to the particular needs of the business. Equally, given the range of options, this can be hard for businesses to navigate and we have experience in helping to find the right financing solution and avoid some like peer to peer lending that might seem immediately attractive due to speed of response but which can leave directors with personal guarantee liability and a straightjacket on their ability to access cheaper, less risky finance at a later stage.

Our advice

With this in mind, we would advise businesses to carefully consider their financing arrangements and engage early with finance providers. Maintaining an open dialogue can have a beneficial effect by developing a good relationship which will assist if facilities ultimately need to be restructured to achieve the long term health of the business. At Gateley, we have extensive experience of supporting companies through these negotiations and can help businesses achieve a positive outcome from negotiations while ensuring that the directors discharge their duties to creditors and achieve a sustainable platform.

Even in a climate where lenders are supportive, there is a risk in not engaging and managing the relationship. Lenders will be resource-constrained as well and will benefit if businesses make it easier for them to monitor the relationship. In our experience, there is typically a negative outcome of a lender being surprised or caught cold at a later stage and this could lead to them taking more action to assess their risk at a cost to the company in cash terms (if external advisors are appointed to conduct an independent business review) and in management time dealing with the process and lenders.

Assuming that a business has sufficient liquidity, dealing with its lenders might seem like a low priority, with the risk of enforcement action in the present climate perceived as remote, even if covenants are likely to be breached. Looking forward facilities will need to be regularised to return to business as usual and get clean audit sign off so it is important not to lose sight of lenders as a key stakeholder in the future of the business.

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