The COVID-19 pandemic is forcing companies to explore how they can optimize their bank financing while managing the current uncertain environment.

We initially published our article on key considerations for renewing your revolving credit facility to help clients take the proper steps to ensure they get the best possible terms in what was a very robust credit market. But things have changed!

COVID-19 has dramatically increased the need to prepare and challenge your banks to optimize your financing. This article reuses the headlines from our previous article to highlight the increased importance of each area as well as additional recommendations for managing the current uncertain environment.

The key is to understand your business profile and needs for the next 12 months

This is becoming the most important step if you want or need to secure new bank financing.

It is now critical to understand your business and its cash flow profile at a very granular level, including the best, base, and worst cases over the next 6 to 12 months. Yes, scenario planning is difficult in this rapidly-changing environment, but you must put together forecasts and assumptions to prepare a picture for your banks as well as the rating agencies. Senior management must validate the forecasts to ensure clear, consistent communication during this crisis.

You also need to analyze in detail all potential liquidity challenges that your crisis scenarios would entail: What is your covenant headroom? Do you have sufficient confirmed liquidity to withstand all your scenarios? What would the impact of a downgrade be?

It is more important than ever that you examine each term and condition of any potential deal and evaluate its impact on your liquidity and flexibility. Negotiate each term, basket and covenant. Look for areas of flexibility like receivables sales/securitizations.

Know your bank credit rating

Your rating is still at the heart of the bank’s business case, but current market uncertainties make it even more crucial. The rating agencies are doing broad portfolio reviews and significant downgrades are likely. Each bank will have a different reaction to the current market: some will still base their credit judgment on public ratings, some will be more conservative and some more aggressive. Some banks will have to make broad portfolio decisions that will impact you regardless of the realities of your own business and credit profile. The normal differences in banks’ ratings of the same company are even more pronounced in this market.

You must talk to as many banks as possible and really understand their risk view in order to optimize your financing. Your lead banks will offer advice, but they will not know what you can achieve until they start marketing your credit. Doing a bottom-up broad market sounding is the only way for you to truly get the best possible deal, and doing it yourself will give you an unbiased view without information being filtered through your lead bank’s own lens.

Craft your lenders’ group

You already know who understands your business in normal times, now it’s time to find out who will stick with you through turbulent times.

Hopefully you have been taking meetings with banks, as we suggested in our previous article, but now is the time to expand your net. Get real term sheets from as many banks as possible and use all your leverage to optimize the outcome. Don’t take offers from banks that require you to give them all your side business without first sounding the broader market.

If you must proceed in these market conditions, consider drawing down your current facility partially or fully. Note: Review all the terms and covenants in your entire debt portfolio to ensure you don’t trigger any covenants.

A final factor to consider

While non-traditional lenders are still an option to consider, you should also include other alternative sources of liquidity. Investors from other asset classes have begun to look at corporate credit as a relative value in this market. Ensure that you are exploring all possibilities, including government initiatives that could allow you to secure relatively cheap funding (but be mindful of potentially stringent requirements).

Conclusion

This may not be an ideal time to refinance your credit facility; you may be wishing you had taken advantage of the markets a month ago, or maybe you started early but now you have to adapt. The key is still to be proactive and thorough in your analysis.

It is a lot of work, and you may be operating with limited staff and resources in a remote work environment, but you must challenge your banks. With more factors than ever to consider (including their own balance sheets and credit constraints), your banks may not have your best interest in mind.

Questions?

Help is available. Firms like Redbridge that normally operate in a remote environment can bring resources to help you ensure that you get the best possible outcome. Contact our experts to learn more.

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