Paths to liquidity in today’s credit environment

COVID-19’s profound impact on the global economy is leaving businesses shuttered and driving unemployment rates to unprecedented levels. The pace with which the world can get “back to normal” will largely depend on when a vaccine or medicine becomes available. In the meantime, governments are cautiously trying to reopen their economies where possible to limit further economic harm.

Businesses are scrambling to enhance liquidity to sustain operations until conditions normalize. Fortunately, many lenders, financing sources and supply chain partners remain constructive and flexible, showing an openness to providing one-time concessions. Additionally, governments are taking ongoing actions. The German government for example has launched several initiatives to support SME’s in attracting funds.

A comprehensive liquidity plan should utilize every option at a firm’s disposal. Four options that can improve a company’s liquidity position include:

  1. revolver drawings and proactive lender management;
  2. utilization of government stimulus programs;
  3. enhanced customer credit management and
  4. seeking alternative sources of capital.

REVOLVER DRAWINGS AND PROACTIVE LENDER MANAGEMENT

The current economic environment leaves an unprecedented number of borrowers at risk of violating their financial covenants. As a result, we recommend that borrowers proactively reach out to their lenders to discuss these issues and closely monitor the following categories.

Liquidity:

  • Proactive 13-week cash flow forecasting to determine near-term liquidity needs
  • Managing revolver drawings
  • Loan amortization and interest holidays
  • Maturity extensions

Lender relationships/covenants:

  • Proactive lender (group) management
  • Initiate dialogue regarding financial covenant holidays or resets

Be informed about the environment:

  • Talk to financial, legal and accounting advisors

GERMAN GOVERNMENT STIMULUS PROGRAMS

The rapidity with which the German government and the ECB are providing economic and fiscal support is unlike that seen in prior crises. There are several complications to obtaining funding, but pursuing funding is still “worth it”.

In the battle against COVID-19, a proactive approach to financiers is necessary. Oliver Marquardt, Director, Oaklins Germany 

CUSTOMER CREDIT MANAGEMENT

In addition to managing their own operations, companies should be conscious of the impact of COVID-19 on their customers. Companies should identify “at risk” customers and work to maximize A/R collections. Potential action steps include:

Collection tactics

  • Increase the level of customer communications through active salesforce participation
  • Offer price discounts for shorter payment terms; negotiate price increases for longer terms
  • Negotiate pay-in-full settlements with distressed customers
  • Enforce service charges on past-due amounts
  • Seek financial statements and parent company guarantees where possible

Internal strategies

  • Track signs of financial distress, including (1) payment delays or A/R balances above limits, (2) requests for discounts or longer payment terms, and (3) sudden increase in returns
  • Consider acquiring credit insurance
  • Conservatively estimate A/R write-offs
  • Manage customer concentration, if possible
  • Seek assistance from your suppliers, such as longer terms, cash discounts and lower price

ADDITIONAL CAPITAL SOURCES

If other liquidity paths are unavailable at the moment, there is a market for additional liquidity through structured debt and equity capital. Direct lenders still maintain significant dry powder and remain open ton selective new deals, even though they will demand higher spreads and all-in pricing and more lender friendly terms (e.g. lower leverage, tighter covenants and more lender protections). Please check our Panel results published in May 2020 “What lenders observe and how they act during the COVID-19 crisis”.

OVERVIEW OF MARKET DYNAMICS

  • More mitigation actions by lenders are expected towards the end of the second quarter, as the depth and breadth of the impact to individual credits will be fully known
  • April financial results will reflect the first full month of COVID-19 impact and more information is available daily regarding the duration of shutdowns, which will impact borrower and lender behaviour
  • Much like it has in previous market disruptions, high yield is taking leadership in restarting the leveraged finance markets
  • Issuers will likely favour shorter-term financing, with the ultimate goal of refinancing at a more opportune time when capital markets improve
  • Equity markets are signaling a rapid recovery once the economy reopens
Overview of market dynamics

The scale of borrowers who will have liquidity, covenant and other problems will reach unprecedented levels, and we are only at the beginning. Lenders have limited bandwidth given the large volume of situations that will need to be addressed. A proactive approach with lenders will help mitigate the resources the lenders need to spend on managing an individual situation and buy the borrowers time to focus on operations and potential strategic acquisition opportunities.

TALK TO OUR SPECIALISTS

Oaklins' trusted advisors have the skills and experience to deliver excellence for every client, from large nationally and internationally listed companies to midsize private businesses. Our clients find that the faith they put in us is well placed, and that our results keep them on top.

Om ack1168 weiss 4x5
Oliver Marquardt Frankfurt, Germany
Director
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Christopher rahn
Christopher Rahn Frankfurt, Germany
Senior Associate
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