Managing debt in a downturn - video transcript

Companies are increasingly running into unpredictable responses from their banks, whether that’s in the context of a refinancing negotiation or in approaching their banks for relief on covenance and importantly the fact that companies have had traditionally very good relationships with their banks is no longer a guarantee that they will be successful in their outcomes because banks are acting in a very unpredictable fashion.  So what we’re seeing is that the fees and the margins that banks are charging their borrowers is going up while the amount of money they are able to borrow is actually coming down, and one of the reasons for that is the banks are increasingly having to allocate their scarce capital to their preferred customers, so it’s very important for borrowers to make sure their on that A list so that when they do need to refinance, they’re able to obtain the level of the debt that they’re requiring from their banks.

One other thing that I’m seeing at the moment is that when companies are having to approach their banks, whether that’s in the context of a renewal facilities or to amend facilities, for example a waiver or a resetting of covenance, is that the banks are using that as an opportunity to charge high fees and also in many cases to re-price their loans by increasing the margin that they’re going to charge to their corporate clients.

We’ve recently been advising two companies in renegotiating the terms of their existing amortisation profiles and in one case we were able to secure agreement of the bank simply by paying a fee and agreeing a slightly higher margin, whereas in the other case, the exact same banks, very similar credit profile insisted on significant equity delusion as a price to giving their consent to that rescheduling.

What companies should do in this environment is to make sure that they’re investing in their backing relationships.  Don’t rely too heavily on the fact that traditionally you’ve had really good relationships with your banks.  Make sure that you’ve got a regular dialogue with you bankers, that you’re providing some timely and accurate financial information to them well in advance of having to refinance.  Also it’s important that you do some contingency planning so if you have some facilities that are maturing or you expect your financial covenance to come under pressure, ask yourself what happens if I can’t refinance at the same debt levels as I’ve had previously, what happens if I have to operate under a very tight financial covenance and can I support an increase in my cost of debt in my financial projections.  In that context, it’s worth noting that companies should expect this year to have much greater scrutiny from their auditors when it comes time to signing off on annual accounts as well.

So I think in summary, if you have facilities that are maturing in the next year, or you expect your financial covenance to come under some pressure, it’s really important in this uncertain and unpredictable environment to not take anything for granted, invest in your backing relationships and most importantly, act early.