How to get the best deal from your lender amid the Covid crisis

Bill Troup, Managing Director of Capital Advisors, explains why businesses with healthy trading and finances despite the Covid-19 crisis are now well-placed to secure better terms from their lenders – and how businesses still struggling with the pandemic should approach the debt discussion

Every business should be reviewing its borrowings in light of the crisis. Not every business has been adversely affected by the economic shock of the Covid-19 pandemic. And those that have come through the crisis relatively unscathed or even strengthened – in sectors such as healthcare support and ecommerce and technology, for example – are in a strong position to demand a better deal from lenders.

This applies both to businesses with existing debt, for whom now may be a good time to explore refinancing on more attractive terms, and to healthy businesses looking for new debt. That might apply, for example, to management teams exploring a buy-out opportunity, or businesses looking to pursue consolidation and buy and build strategies.

Banks have had little appetite for new customer lending since lockdown began in spring 2020. They have had a massive workload assessing all their lending positions and helping existing customers work through their problems. Also, the main sources of new customer lending all but dried up – M&A activity slowed to a trickle,  pre-maturity refinancings were postponed and potential new borrowers delayed plans. With the pandemic induced backlog largely behind them many banks are keen to secure new customer lending to good credit stories. Competition for those deals puts management in a strong negotiating position.

Unlike the global financial crisis of 2008 there is no liquidity crunch in the banking system this time around. Banks came into this crisis well capitalised; also, a broad range of alternative lenders have come into Europe’s leveraged debt market in recent years. These new entrants have different appetites for risk and have brought innovation to the market, broadening the variety of debt structures as well as increasing the total amount of credit available. Most importantly these alternative lenders have fresh capital they want to put to work and, although navigating this market can be challenging for finance directors, the effort can reap significant rewards.

In this context, finance directors with healthy balance sheets and resilient revenues have every reason to be confident in securing a great deal from their lender. But getting this from lenders requires good preparation and tactical nous as well as nerve. Finance directors should be ready to:

• clearly set out their business plans, highlighting the risks to the business and how these will be mitigated, including the impact of Covid;
• explore the broad range of lenders and debt structures available in the market;
• be clear about how funds raised will be deployed – for example, for bolt-on acquisitions, refinancing of more expensive debt, or to return cash to shareholders;
• engage an advisor who knows the market, can make a process smoother and allow management to focus on the performance of the business.

Time for struggling borrowers to act too

What about businesses in a weaker position amid the pandemic? Well, so far lenders have largely taken a sympathetic approach. Their priority has been to help borrowers resolve liquidity issues, with or without support from the various Government-backed loan schemes. Lenders are approaching covenant tests on a case-by-case basis, but have typically waived tests for 2020 – and in some cases for the early part of 2021 too. Alternatively, they have offered increased headroom or sought to reset covenant levels.

Sooner or later, however, there has to be a reckoning as forbearance will not last forever. In 2021, we are likely to see a growing wave of refinancings and debt restructuring to deal with breached covenants or liquidity problems that have not receded even as the economy recovers in the wake of the pandemic. While lenders’ patience is welcome, businesses concerned about their debt exposures need to use this time well and prepare for potentially difficult conversations with their lenders.

That requires an honest assessment by management of the business’s current trading position and likely prospects. Moreover, this assessment will need to be updated regularly, as the market environment changes amid the fluidity of the response to Covid-19. In practical terms, finance directors need to:

• be prepared – clearly identify the impact of Covid-19 on the business, highlighting the operational and financial mitigation actions taken;
• have a clear idea of what outcome they are looking for regarding borrowings, backed up by revised forecasts;
• explore and understand what other financing options and providers are available;
• start the conversation with lenders as soon as is practical to get ahead of their decision-making;
• engage an adviser who can help the business work through its options with lenders.

For those businesses that were performing strongly prior to the crisis, there is good reason to be optimistic about a positive outcome from these negotiations, even if recovery looks some way off, so long as liquidity is maintained. For some businesses the harsh reality is that increased levels of debt as a result of the pandemic combined with reduced revenue mean they will no longer be viable, even on a medium to long term view. The sooner management acknowledge this and explore their financing options the better, and preferably before they find themselves dealing with the lender’s work-out team.

Looking through the crisis

The bottom line is that every business should now make it a priority to think about their debt. Struggling borrowers need to assess their debt exposures and talk to their advisors about available options and the best way to proceed; those not in difficulties should be exploring whether they can secure better terms on existing debt or whether now is the time to take on new borrowing to support their growth plans. Lenders will look for the strongest credits, and businesses with robust balance sheets and good prospects will be able to capitalise on that appetite.

Bill Troup is the Managing Director of Capital Advisors