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 Dutch government for example recently increased the guarantee funds available through the “BMKB” (Borgstelling MKB-kredieten) and “GO-C” arrangements (Garantie Ondernemingsfinanciering) to support SME’s in attracting funds. Thereby, the “NOW” arrangement (noodmaatregel overbrugging voor behoud van werkgelegenheid) provides financial relief in exchange for maintaining headcount.

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

revolver drawings and proactive lender management
utilization of government stimulus programs
enhanced customer credit management
and 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:

1. Liquidity

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

2. Lender relationships / covenants

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

3. Be informed about the environment

Talk to financial, legal and accounting advisors

Dutch government stimulus programs

The rapidity with which the Dutch 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”:

NOW-application period is until May 31, 2020. The relief is intended to give companies a temporary funding bridge to economic normalization. Extension of the program is currently being discussed
The BMKB and GO program funds have been increased to EUR 1.5bn and EUR 10bn, respectively
Tax deferral application period for corporate taxes is until June 19, 2020

After applying for NOW-grants keep all documents and data organized as it will serve as the basis for justification of the grants afterwards.

Over the next few months, as the COVID-19 crisis transitions into the reopening and recovery stages, many companies have to continue to carefully assess their liquidity needs and financing options BAS STOETZER PARTNER OAKLINS NETHERLANDS

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: payment delays or A/R balances above limits, requests for discounts or longer payment terms and 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 prices

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 to 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).

Overview of market dynamics

More mitigation actions by lenders are expected towards the end of calendar Q2, as the depth and breath 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 shut-downs, 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 favor 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.

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