COVID 19 | Is coronavirus affecting your banking arrangements?
COVID 19 | Is coronavirus affecting your banking arrangements?
Does your businesses need to consider its current banking arrangements? Working capital, cash flow and additional stock, overdraft facilities and covenants are all subjects that need careful management – even more so with the current coronavirus having such an impact on businesses.
We’ll take a look at what you should do, how you should plan and what steps you can take to protect your business in these challenging and changing times.
Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us.
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Good afternoon. My name is Christopher von Strandmann, and I'm a banking partner here at Shakespeare meatineau and welcome to today's webinar on coronavirus and the impact that it will have on your banking facilities.
The implications of covid-19 are fast evolving and we have seen a number of Institutions becoming increasingly concerned about the impact that it will have on their business in the UK. And the rest of the world. There are health concerns disruptions to work as abilities to come into the office supply chains in terms of both products and goods being delivered on time as well as services. So for example, valuations been done or Auditors been able to sign off and accounts. We also have the General market conditions in relation to the ftse that we've seen.
And earlier this week the bank of England further reduced interest rates and the government announced the raft of new measures to help businesses going forward more information on which we hope to have as quickly as possible each of these issues when taken together as a whole will have an impact on company's existing banking arrangements as well as their ability for them to put in place new ones as they look to either refinance or make Acquisitions.
The purpose of this webinar today is to discuss on a very high level some of the the issues and themes that borrowers may need to consider over the next few weeks and months noting. Of course that each loan agreement is specific and will have been negotiated with specific contractual wording. So as the government moves to quite understandably try to prevent further contagion where possible we saw the chancellor and prime minister statements yesterday and business of all shapes and sizes will already be feeling the economic pressures pressures of the crisis business as usual has been the overriding message.
But with recent school closures and pubs and clubs being shut down the government has been trying to provide certainty and assistance to companies.
In order for business as usual to become a true reality though contingency plans needs to be put in place rather than trying to be too exact about finer details at the moment a thorough plan should be considered by a number of for a number of possible scenarios along with company impact analyses, which can Flex depending on the changing economic and social landscape.
all organizations even those with the generous generous cash reserves would be wise to open up lines of communication with their Banks sooner rather than later as funding is going to be critical for the coming months particularly when it comes to cash flow the requirement for unexpected investment in extra stock to prevent supply shortages should come as no surprise in this situation is essential to speak to lenders about overdraft facilities and potentially opening new light revolving lines of credit, especially if Supply As up the chain also behind on payments due to cash flow pressures the nature and the spread of the covid-19 means that an increasing number of workers are going to be self isolating if they became if they begin to demonstrate symptoms. And even now we see people are being told to work from home in an attempt to spread attempt to stem the spread of the virus. However for businesses the impacts could be severe if a large proportion of the workforce Workforce are unable to work new regulations.
Nations which came into Force last week state that employees who show covid-19 symptoms and self isolate in accordance with published guidance and now entitled to claim statutory sick pay from day one despite promises that the government will refund these payments the time frame remains unclear and the lag for reimbursement could put even more pressure on cash flow. Especially if temporary workers needs to be recruited to provide cover and this is why we are recommending businesses to pick up the phone and arrange new revolver.
In credit lines an overdraft facilities as quickly as possible. Should they feel the need to employee base is moving to work from home aside from throwing up operational challenges could require businesses to unexpectedly Source Capital to provide suitable it equipment such as laptops and mobile phones. All of this will be necessary to keep businesses wheels turning but this investment has to come from somewhere and if cash reserves don't look like they will stretch far enough talking to Banks.
Banks about potential short-term funding options would be a wise move now cash flow for expenditure aside and many businesses will have several funding agreements in place with different banking institutions attached to these could be different covenants, which could be breached depending on the evolving consequences of the covid-19 crisis. For example, some agreements will often contain clean down conditions which require businesses to keep accounts and credit for a set number of days each month.
Other covenants which could cause issues may be around leverage and debt servicing ability. If a business is a we're ahead of time that a breach is likely then a proactive stance could be taken to mitigate against mitigate against this however any business owner who is unsure should ask the advice of their banking advisor and relationship manager sooner rather than later.
The UK banks will be doing their bit for the business Community. The sector recently came out with a list of emergency measures including suspending loan payments and fee-free Emergency Loans to help businesses already facing challenges, its early days still and support amongst the banking Community is only likely to increase this alongside the government's apparent willingness to try and help businesses in the short-term should come as a positive. However, no matter how great the support on offer is Banks hate.
Says they won't know what they don't get told so for our Bora Bora clients with saying open a dialogue at an early stage and lay your cards on the table at this is far more likely to result in a workable support support support. Then the bearing your heads in the sand. Also, it's important for businesses to realize they're not alone when asking for assistance. This will become a common theme across the whole of the UK in the next few months.
Commercial ad on certain times like this is having a place in plan which can Flex as circumstances change around the country Business Leaders who feel like the pressure of decision-making rests solely on their shoulders should aim to involve other employees and employee groups extraordinary times call for Extraordinary approaches and faced with uncertainty. That's no bad idea. No one is under the illusion that in the coming weeks and months. It will be easy for UK businesses and their communities. However, financial support will be out there.
And it's essential that lines of communication between organizations and their funders are kept open to ensure that wherever possible UK business weathers the storm and comes back fighting.
So going into a bit more detail on facility Arrangements more. Generally. I'm going to look at a few Provisions actually seen come out recently as well as responding to a few questions over the last 24 hours. Number one interest rates the bank of England cut interest rates last week and then further cut them to not point one percent yesterday. So this means that borrowers are floating rates who are paid to base rates should see a reduction in their monthly and quarterly outgoings.
Committed funding certain funds transaction transactions are either required for regulatory reasons usually due to take take over laws or because the vendor of particular asset wants to bank back certainty on new purchases ability to close the transaction and thus will not allow a financing condition in its sell and purchase agreement in a certain funds transaction in the m&a market.
There are generally very limited conditions which will allow financing parties to withdraw their commitment committed funding from the transaction and say, Covid-19 should not have an impact on existing committed funding arrangements and so a bill its purchases ability to draw down and close should not be negatively impacted. However, whilst existing Arrangements should not be of an issue.
The requirements provider committed funding line met in the short term but some funders off looking at New Deals as they look at market conditions and the possibility of a recession as well as the ability to Syndicate while the Coronavirus so action develops material adverse change is also a point which borrows needs to look at. There are generally three limbs to a material adverse change clause in the business of the borrower payment ability and a more General market one. It's relatively rare to include Mac Clauses in an acquisition financing as a doorstop, but they can be included under circumstances.
Looking at the three limbs of a material adverse change provision will have got business first. So most facilities will have a business Mac it typically relates to an adverse effect on some of some or all of the business condition operations performance assets or prospects of the borrower given where the UK is on the curve of the outbreak is difficult to say what the impact will actually be and how or when it will affect any particular business.
However, to extend that the existing circumstances subsist for a significant period of time particularly as businesses report on q1 2020 was Financial results. We expect then the lenders to monitor these Provisions more closely. You have the payment material adverse change which relates to the borrower's ability to pay to make its payment obligations under a finance document payment obligations are fairly straightforward to determine and traditionally focus on a 1 to 6 month time frame accordingly to trigger this.
The relevant lenders would need to probably establish that the issue that the borrower will be unable to make its payment obligations over the such a time frame. This can be difficult for lenders to prove.
We then go on to the market Mac, which is much wider and a more General provision, which looks at the Mark General market and could relate to currency fluctuations share price and other such matters as we have all seen The Wider stock market has generally reacted negatively to covid-19. And so may this may give lenders the ability to call the default in these circumstances that being said even back in 2008 to 2010. This provision was very rarely used and lenders will often.
To avoid using this provision as a means of enforcement, but that may nevertheless also have market conditions may have an impact on be able to Syndicate or bringing in New Deals.
You then obviously have the financial covenants and most loan facilities will have a certain level of these. So for example property-based deals will have an LTV Covenant.
And they will they will usually be a provision in there which will allow A lender to attain a valuation which when it believes or reasonably believes that an event of default would occur.
It's going forward borrowers need to be aware of this as banking Banks and lenders may be going to request such valuations ebitda or more corporate based covenants will be based on the annual or quarterly accounts for business and will be certified through the usual compliance certificate read this breach is that we believe will become more likely over the coming months as the end of q1 accounts for 2020 become too we then move on to litigation and creditor processes as businesses start to feel the strain it's likely that litigation or creditors process Provisions will be looked at by lenders especially when other debtors feel that there is a need to take action there is often a provision which allows for discharging such actions within a certain period of time but in the event that a borrower experiences such issues it's vital and it takes sound legal advice and speak to Banks as soon as possible There are also the ongoing reporting requirements. So you have quarterly or monthly reporting which is a general undertaking underfinanced documents and this typically requires audited annual and unaudited quarterly or monthly accounts to be delivered to A lender or agent within a certain specified period of time businesses interrupted by coronavirus May face certain reporting issues such as an inability to obtain accounting information due to facility closures.
There is generally no provision within a facility document for additional time for filing such information due to external issues. And so again, we would suggest that borrowers pick up the phone to their lenders if they do experience such issues.
Please do get in contact with anybody at Shakespeare Martineau going forward if you have any queries or questions, and thank you very much for listening. We have had a few questions come in today earlier on today, and I will try to answer those as quickly as possible. Please do keep looking at our LinkedIn page and our website for any further updates. Thank you very much. Bye. Bye.
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