As the severity of COVID-19 increases, we have seen exceptional changes to our lives and the way we work. Businesses need to adapt quickly as do their employees, customers and other stakeholders. We have seen governments around the world take unprecedented steps to keep businesses going with initiatives such as tax payment deferrals and promises to make funds available.
Let's explore some issues that businesses are facing in relation to their funding:
- Covenant breach / default – Perhaps the most clear-cut sign of any dip in trading will be the impact on financial covenant performance. Businesses would be well advised to model for this scenario we now face and approach their lender(s) for suitable waivers or grace periods.
- Drawing of facilities - Businesses are fully drawing their working capital facilities to ensure liquidity. This also includes calling on incremental facilities. But the ability to draw on these can be subject to performance criteria or no default etc.
- Government backed schemes – The details of the loans to be provided and their conditions are being finalised, but it is important to check there are any controls in existing loan documentation. Most bank documentation contains a prohibition or some retraction for taking out additional loans or granting security without your lender's express consent.
- Operational issues – Are you able to run your board meetings virtually? If travel restrictions are imposed will this impair the ability of the board to meet? Are you able to approve financial statements, or of the auditors to review the information they require to prepare the financial statements?
- Information – Are you able to maintain regular information flows to your lender(s)? Could remote working, illness travel restrictions impair the ability to comply with these key provisions. Many loan documents require businesses to have regular (quarterly or semi-annual) meetings with their lenders.
- Other sources of finance – dependent on location and the availability of state backed funding, there may be other forms of finance available including short term (eg: overdrafts) or more structural arrangements like invoice discounting.
It is, therefore, perhaps more important than ever that businesses assess the likely impact of a significant downturn in revenue in the short term and seek to agree pragmatic solutions with lenders, investors or other stakeholders, as well as investigating their legal obligations under any funding documentation.