by Rachel Adams - Solicitor, Banking and Finance
Capital / interest repayment holidays, financial covenant suspensions, resets and waiver letters are all a current fact of life for Lenders and Borrowers. If there's one consistent theme that runs through all of this activity, it's that in a pandemic affected economy producing meaningful financial projections and forecasting has become a major challenge.
Weathering the Storm
In this time of “lockdowns”, battered supply chains, and demand slumps across most sectors, Borrowers are struggling to weather the storm. For businesses to get through this extended period of uncertainty and to continue their operations at some level, the continued availability of finance and liquidity is key. But with both Borrowers and Lenders grappling with such unprecedented circumstances, social and economic, the truth is they must work together to review existing credit facilities, keep lines of communication open and try to anticipate problems in order to avoid unnecessary defaults.
It’s good to talk
The recent lender toolkit of waiving or deferring obligations in loan agreements or adjusting or suspending financial covenants ultimately can only be deployed if a Borrower has communicated the need. Lenders are not mind readers so the message is straightforward, early engagement and clear communication are key to getting Lenders onside.
With most reporting done quarterly, and the traditional quarter days being March, June, September and December, Borrowers who have successfully navigated Q3 should be considering now the likely impact of the December quarter when the full effects of Covid-19 will really be seen on corporate balance sheets. With Lenders now reporting significant increased bad debt provisioning, financial commentators are beginning to look closely at their performance as well.
The Shape of Recovery
While many sectors have experienced once in a generation demand falls, forecasters are scrambling to both identify the signs of a sustainable recovery and to define how it will look. We may be in a Coronavirus induced slump but recessions do not last forever. What will the recovery look like? V, U, W and L shapes have all been much discussed. Whether it’s a steep decline and quick recovery (V shaped) (the current trajectory), a quick recovery with a second decline (W shaped), an extended downturn (L-shaped), or even the ‘mixed recovery’- being good for some and bad for others (K shaped), these letters all represent a taste of what the future may hold and will ultimately underpin any financial forecasting that will form the basis of all business and credit decisions for both Borrowers and Lenders.
More than ever, robust and meaningful projections will be harder to produce, more challenging to accept, yet never more necessary to deliver.