Bulletins

While today’s experience is largely unprecedented, we have seen in fairly recent economic history (such as the “great recession” of 2008-09) the impact of global business disruption and have learned coping mechanisms that will help reduce, although of course not eliminate, the collateral damage.

1. Crisis Management. In this regard, we view the near term (i.e. 90-180 days) as more about crisis management than structural change. As in any period of financial crisis, the first question is whether a business has enough liquidity to pay its ongoing debts, until the point that the crisis abates. If a business realizes that it is in an illiquid position, then it is often too late to remedy the situation. Therefore, anticipating the problem is a critical step in solving it.

2. Short Term Liquidity. We often begin to assess distressed companies through the lens of a 13-week cash flow projection. This period is generally accepted as the first level of analysis for business sustainability. Ironically, this period may well match up against the expected critical span of the current pandemic, so it is a useful tool to guide business decisions at this time.

3. Existing Cash Draw. For businesses that have an existing line of credit with current availability, a pre-emptive draw designed to cover any anticipated deficiencies during the distress cycle would be a smart move to consider at the outset. In this low-rate environment, a debt draw is relatively inexpensive insurance to provide the cash necessary to sustain critical loan repayments, rent, wages, taxes, and trade payments while revenues may be impaired or deferred. Smart and anticipatory placement and use of such funds can provide a cushion to absorb critical future payment obligations.

4. Outreach to Lenders. Another pre-emptive measure to consider is an outreach to your lenders to map out the near term expectations and strategies. During periods of high uncertainty and anxiety, it is often better to call your lender than to receive the call from them. Going to a lender with a justifiable game plan sends a message of both financial responsibility as well as operational transparency. When a solution largely depends upon trust in the relationship, a pro-active approach can create the foundation for a constructive dialogue. However, in order to responsibly approach your lender, you need an understanding of the ground rules: balance sheet financial covenant requirements and compliance, minimum required cash balances, realistic revenue and cash flow analysis, and responsible financial forecasting. These metrics should be considered with your advisors immediately, in order to be prepared for that key conversation with your lender.

5. Trade Credit. Alternate sources of liquidity should also be considered in the go-forward plan. Trade debt can be another means by which businesses can generate short term liquidity. We should anticipate that the payment cycles for goods and services will be stretched on both ends: buying as well as selling. The strategic drift from a 30-day payables cycle to a 60-day cycle can unlock significant liquidity without incurring the need for additional bank debt. Assuming we are in a relatively short term crisis, businesses should be able to flexibly extend, and then contract, this component of their cash flow.

6. Other Liquidity Sources. Private non-bank lenders have always played a role in supporting businesses who were not traditionally “bankable,” particularly during times of general financial distress. Fortunately, we remain in a low-rate lending environment, so even the higher risk lenders have shown a willingness to lend at what would be considered historically “reasonable” rates.

7. Creative Financing. Multi-tiered debt structures can offer supplemental and short term liquidity by creatively allocating a borrower’s collateral and the priorities of claims. Often, the layers below the primary institutional lender fall into the hands of private lenders, PE firms and convertible note rounds. As the edges of debt and equity begin to merge, the possibilities of creative financing expand.

8. Government Programs. Governmental support will undoubtedly play a key role in short-term business sustainability and longer term financial restructuring. It is already clear from the early acts of Congress, the Federal Reserve, SBA and other agencies, that the lessons of 2008-09 include general monetary expansion and support and “bail-out” policies for certain industries and other constituencies in particular. It will be critical to stay abreast of such programs, and be ready to apply where and when they are available. As this is a currently evolving situation, we will provide key links in future updates.

Each of these points will stress the need for current financial reporting and awareness of key business metrics, as well as up to date corporate governance documentation, as these programs will undoubtedly require diligence in the underwriting process. At each step in managing through this crisis, our team of professionals is positioned to serve as a key strategic resource in addressing the business, financial, and legal needs to help your company survive the current disruption and prosper in the inevitable recovery. Early awareness, pro-active communication, and swift and effective action are required during such times, and our firm is built to be your strategic partner to help foster your success. Whatever your situation, we are here as a resource for any business and finance advisory needs in this challenging environment.

View the full article on COVID Considerations here.