The UK and devolved governments are implementing a number of measures intended to mitigate the economic impact of the COVID-19 pandemic. Businesses are reviewing their own positions and taking a number of steps to protect themselves so that they are in as strong a position as possible to get through the crisis and emerge from it in a viable state. The position of existing borrowing and the availability of future borrowing is a critical part of this and borrowers, banks and other funders need to consider a series of questions, including those outlined below.

Planning cashflows

Businesses need to update their immediate and longer-term cashflow positions, capital expenditure plans and other business and financial forecasts as best they can. They should take account of trading conditions and available government COVID-19 assistance with the likes of payroll, rates and other taxes, while bearing in mind possible diversification, the availability of business interruption insurance and possible asset disposals. Assumptions underlying figures will be significantly less reliable than normal and the sophistication of advice and analysis required will vary greatly among businesses.

Projecting borrowing requirements

Financial forecasts will drive funding requirements: the level of borrowing required, when it is required in order to operate or protect the business, and how and when it will be feasible to pay interest and capital.

Reviewing existing facilities

You should be asking:

  • Are there existing or possible future defaults under existing facilities? Is the current position a “material adverse change” or other event of default? Is there a default cure mechanism? 
     
  • Can next payments be made (remembering overdrafts are technically “on demand” anyway)? 
     
  • Are financial covenants likely to be breached when they are next tested?
     
  • How much headroom is there on overdraft, invoice finance and other working capital facilities and is it still available? Are capex or other facilities still available to draw?
     
  • Can any conditions precedent to further drawing of facilities be satisfied and is it practicable, even at level of getting documents signed?
     
  • Do I need to consider group or personal guarantees?

Fitting requirements to existing facilities

You should be asking:

  • Is a waiver of existing or prospective payment, covenant or other default required?
     
  • Is amendment preferable to waiver in order to prevent cross-defaulting other loans?
     
  • Is amendment required anyway to provide capital (and perhaps interest) holidays, extension of repayment schedules or writing off some debt and adjustment of financial and other covenants? 
     
  • Can interest payments be reduced given the reduction in the Bank of England base rate to 0.1%?
     
  • Is new money required?

Getting new money

You should be asking:

  • Will it work with bank loans only or is equity needed from shareholders or a third party?
     
  • Do I need the consent of other existing lenders? Can it be obtained? Will they participate?
     
  • Are alternative unused sources of debt available, such as invoice or asset finance or asset based lending?
     
  • Are the COVID-19 grant, debt or guarantee schemes available and are any available through a current lender? 
     
  • Does the existing or new lender have access to the COVID-19 Bank of England Term Funding Scheme to boost SME lending?

Putting changes in place

Close liaison between borrowers and lenders and among lenders and all of their advisers will be critical to implementing the new arrangements and preventing unilateral action by one of several lenders that would jeopardise the new arrangements through enforcement, setting off any credit balances or preventing interim use of overdrafts and other working capital facilities.

Mutual standstill and other interim and ongoing inter-creditor arrangements may be necessary or useful. Indeed, it may be sensible in some circumstances for borrowers and/or some lenders to make contingency plans to put in place a moratorium on creditor actions by putting a borrower into administration while a debt restructuring is implemented, whether by negotiation, company voluntary arrangement, scheme of arrangement and/or pre-packaged business disposal.

Dr Hamish Patrick is a partner in Shepherd and Wedderburn’s banking and finance team. For more information, contact Hamish on 0131 473 5326 or at hamish.patrick@shepwedd.com.

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