Managing Debt Finance in Current Times
The effects of Covid-19 have been dramatic for Irish businesses, and it is crucial that leveraged businesses actively engage with their lenders to prepare for the end of government supports and bank forbearance.
Where Are We?
It has been almost a year since the onset of Covid-19 in Ireland. There have been significant changes in both the business landscape and consumer behaviour. Lockdowns are a way of life, social distancing is compulsory, working from home is standard, tele-conference meetings have replaced the previous “face to face”, leisure businesses have been temporarily shut and online retail volumes have surged – these are just some of the consequences which are now part of daily life. The Government has been pro-active by implementing a number of measures including wage subsidies and forbearance from the Irish Revenue. The Irish banks have also offered all lenders forbearance on their loans for the initial 6 months and are generally working with borrowers who are still being affected especially those in the hospitality, leisure and retail sectors.
While these measures have critically given businesses the breathing space to implement the appropriate actions to deal with the impact of Covid-19, it is crucial that businesses immediately engage (or re-engage) with their lenders to put a plan in place for the time, when the Covid landscape improves with the continued rollout of the vaccine, and government supports and bank forbearance ends.
We are seeing, both from domestic and international lenders, that debt finance is now harder to obtain. In some cases, lenders have stopped all lending to certain sectors, such as leisure for example, while Loan to Value ratios have decreased and the cost of funding has increased. This means that if a borrower is able to re-finance existing debt facilities it may result in: 1) poorer loan terms and 2) a borrower cash injection. Therefore, it is essential that a positive, constructive relationship is maintained with all existing lenders in order agree a path ahead that works for both parties when the existing forbearance period ends.
While it is positive that the Covid 19 vaccination is being rolled out and this should lead to a gradual re-opening of the economy, it is imperative that borrowers engage with their lenders immediately.
As borrowers have had 11 months of dealing with the impact of Covid-19 and managing the cash flows, they have a clear picture of the impact that it has had on the business to date, and based on this experience can prepare a business plan and financial projections if they have not already done so. The optimal outcome for all stakeholders is for the business to remain viable and come through this unprecedented period, therefore based on our experience, all lenders will work with their borrowers to achieve this outcome. It is important to note that this will involve a proactive fully transparent approach from the borrowers and will involve flexibility from both borrowers and lenders.
In order to prepare for engagement with the banks whether it is a trading business or real estate project, the following steps are critical:
- 36 month cash flows identifying key funding requirements and a return to positive cash flow.
- A business plan which highlights the crisis period, initial recovery and a “return to normality”;
- Identification of other potential sources of capital.
Businesses which have not availed of bank forbearance to date and are repaying loans from existing cash reserves may not be able to sustain these repayments and should follow the same steps when dealing with their lenders.
Gallagher Keane can assist businesses on the following:
- Use existing relationships with all lenders to maximise options available;
- Preparation of financial models and business plans for presentation to lenders;
- Review of debt terms and covenant calculations; and
- Present proposals and negotiate revised terms with lenders
Our clients range from SMEs to large multi-national companies and we know this is a challenging time for many but we are here to help and support you. If you think we can be of assistance please get in touch.
Email: [email protected]
Call: +353 1 9695100