Actions will encompass covenant relief, interest and/or amortisation deferrals and assessing emergency liquidity needs. Evolving pandemic mitigation measures and government aid packages are adding to this fluid landscape.
Navigating the next few weeks and months ahead will no doubt be challenging. So far, borrowers have been taking the following key actions including:
- Drawing existing liquidity facilities
- Assessing additional funding needs
- Pro-actively engaging lenders
Drawing existing liquidity facilities
Borrowers have been drawing on unutilised liquidity facilities, regardless of existing liquidity levels within the business. In addition, borrowers have been extending interest periods, deferring interest payments, holding non-critical cash outflows and using the flexibility on their various baskets to provide further headroom. In uncertain times such as these, having this readily available liquidity can be crucial.
Assessing additional funding needs
Borrowers have been assessing their near-term cash flows, taking into account mitigating actions, the financial support measures that have been made available by the government, and any other levers that can be pulled, to aid liquidity. Additionally, many management teams have been running scenario analyses for the ‘unthinkable’ to stress test liquidity. These exercises are valuable in highlighting whether there are any upcoming liquidity pinch points and funding needs.
Pro-actively engaging lenders
Borrowers have been pro-actively engaging with their lenders to discuss how they are being impacted, what actions they are taking and if they require any lender support. Lenders remain pragmatic and willing to support viable businesses through interest and/ or amortisation deferrals, to providing additional liquidity lines. With the heightened scrutiny on credit quality, these requests should be accompanied with clear and deliverable business plans, demonstrating the businesses viability over the longer term.
- Lenders and sponsors are focused on their existing portfolios to determine those that are worst impacted by COVID-19. The primary concern is ensuring businesses have sufficient liquidity for the next few months
- As such, lenders are being inundated with drawdown requests as borrowers seek to maximise their liquidity position
- Lenders are keen to support the businesses that were performing well prior to COVID-19 and those that have ‘a reason to exist’
- New deal flow and M&A related activity has stalled as sponsors experience reduced bandwidth, and reduced appetite to explore new opportunities
- Activity over the comings months is expected to be focused on raising short term liquidity, amendments, covenant waivers/resets and restructurings
- Whilst it is too early to determine the longer-term consequences on the loan market, the immediate impact has been reduced liquidity and leverage appetite, higher pricing and tighter terms
- Since France’s nationwide lockdown, sponsors, banks and private debt funds have re-focused, switching from deal making to ensuring their portfolio companies can go through this period of time
- Subsequently, most have urged their portfolio companies to ensure all potential forms of liquidity (including French State support) will be available
- Though most processes in France have been paused, pending clarity on the impact of the lockdown, businesses have been cash forecasting tapping all liquidity sources made available, and postponing all possible cash-out to avoid liquidity shortfall situations
- Past the lockdown, existing capital structures will have to be reviewed based on a ‘back to normal’ EBITDA, and this phase should be prepared in advance
- The primary focus of lenders is currently on their own portfolios rather than on acquiring new business
- Since the start of the German government liquidity aid, banks have struggled with high volumes of loan applications in a short time period. Lending remains restrictive, however, as banks continue to hold a portion of risk when providing these loans
- Due to these high volumes, businesses have to wait to receive government aid / loans
- Companies without a local bank (Hausbank) are finding it challenging to source one, as banks focus on existing relationships. Subsequently, we anticipate an increasing number of covenant breaches / waivers, deferral of loan repayments, and companies running into insolvency, who are unable to bridge their liquidity gap immediately
- Given application volumes for government support, companies should approach existing lenders sooner rather than later – this time is critical in preparing necessary documentation for applications
- In Spain, primary debt market have shut down with no or limited M&A activity, while the secondary market has increased, following an opportunistic approach
- Private debt funds with a special situation angle are open to take advantage to the COVID-19 outbreak
- Government funding programmes are in place, but focused on providing liquidity to small and mid-sized businesses
- With both equity and debt funds currently focused on portfolio assets, we will be seeing an increasing number of restructurings, covenant work and rescue finance deals in the market
- The lack of assessment around the economic impact of COVID-19 has also made it more difficult to define financing terms and conditions
- Except for a few niches (e.g. online education, telecom and infrastructure) most M&A auction processes have been postponed or cancelled, however there is still room to get a successful deal completed in bilateral negotiations
- The current COVID-19 crisis is expected to have a material impact on both sponsor and lending activity
- Private equity firms currently have a greater focus on portfolio companies, managing the liquidity issues that many of them are facing due to the closure of non-essential economic activities in Italy, leading in turn to limited income (and therefore inflows) for a prolonged period of time
- Subsequently, lending activity is current focused on re-negotiations of existing financing agreements, as opposed to new finance. The majority of new finance is being deployed to help entrepreneurs and companies in difficulty, rather than to fund new acquisitions
- As a result, we have been witnessing a slowdown in deal flow and generally in M&A activity, with many live deals being put on hold until more visibility, on both the sanitary and the economic fronts, becomes available
- Corporates – whether PE owned or private – are also focused inward, tackling issues like liquidity and contingency plans, as opposed to new opportunities
Restructuring will therefore undoubtedly be on the rise, alongside take-private deals, as the economy reels from the initial outfall of the virus.
As ever, we are here to advise our clients in all types of market scenarios. Our Debt Advisory & Restructuring practice provides a full suite of balance sheet solutions, including advice on short-term liquidity, amendments, refinancings, covenant waivers and resets and restructurings. With access to the full range of capital providers we are abreast of the developments in the loan market and in particular, the impact from COVID-19.
Please do feel free to reach out to the team via the details below - we would be delighted to discuss any market or specific questions you may have.