How to negotiate with your banks and lenders in uncertain times

The economic headwinds which have faced the Irish economy recently and are likely to continue into 2023, predominately relate to:

• Rising interest rates
  
• Rising inflation
• Energy price fluctuation

These headwinds have had an impact on Irish borrowers who may have both existing debt and new debt requirements with banks and alternative lenders. The world since 2010 has seen very low interest rates which has allowed some companies borrow money cheaply and use debt as a mechanism to finance business growth. 

Whilst we are still seeing a healthy appetite from both domestic and international lenders for funding both new debt requirements and refinancing, these headwinds have also had an impact on lenders as they now face (a) tighter credit conditions, (b) elongated decision-making processes and (c) tightening of sentiment. Borrowers are navigating difficult trading conditions which results in cases of:

• actual or potential breached covenants
  
• issues in meeting debt obligations and therefore potential events of default
• funding deficits against their business plan
• refinance risk

Debt plan for discussion with lenders

As part of a debt plan and working with your advisor companies, you should consider some of the following items:

1) Present to the lender early

Both traditional and real estate companies should present to their lender early, whether they are looking for new debt, facing a refinance or covenant breaches, by presenting a critically assessed, recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants. This plan should be after you consider the following “self-help” measures your company has undertaken.

• Enhancing revenue and portfolio optimisation: identify and remove loss-making products and services
  
• Price: understand and demonstrate what costs can be passed on to the end user
• Improving margins: demonstrate to your lender how you have improved margins, and mitigated against rising costs
• Productivity and efficiency improvements: ensuring costs are controlled
• Labour cost management: deliver an employer value proposition to manage wages and retain talent
• Policy optimisation: reduce cost base through regulatory & government supports

2) Be proactive with Revenue/creditors/customers

Commence discussions with Revenue and other creditors in a timely manner to set out appropriate plans and continue to engage with customers to understand your receivables timelines.

3) Forecasts/covenants/debt requirement

• It is important to demonstrate the impact of the self-help measures the company has taken on the forecasts of the business and how this impacts your financial covenants (for existing borrowers) or projected covenants (for a new borrower).
  
• The self-help measures and the financial model outlining forecasts should result in you fully understanding the funding requirement of your company, which in turn helps you identify the debt ask from the lender.
  
• Assess your facility agreement and ensure you fully understand the terms and conditions of your lending documents, including all covenants, what your covenant headroom is and all events of default that are in your lending documents.
• Having established the funding requirement of your business, being able to demonstrate to a lender how they are getting repaid is a key part of your negotiation. Whilst banks and most debt funds will usually expect repayment to come from the free cashflow of the business, some debt funds and special situation funds will look at repayment from other sources including the sale of assets, partial disposals and other liquidity events.

4) Additional sources of capital:

Some companies are carrying a high net debt:EBITDA, high loan-to-value and low interest cover ratio.  A review of the capital structure of the company and these key leverage ratios as well as the ability to service principal and interest will be a key determinant in understanding if your business should look at other sources of capital to meet your company’s funding objectives in the short, medium and long term. Consider if there are other sources of capital from your existing debt provider or other debt and equity providers that you could access.

5) Regular review:

Ensure your cashflows and revised strategy are kept under regular review and the requirement for additional sources of capital is reviewed on a continuous basis. Stay up to date with government supports available for your company and consider your hedging policy against best practice and regularly review.

6) Recovery:

The presentation/discussions with your lender, restatement of your cashflows and plans where applicable for additional sources of capital needs to demonstrate that you are on the path to recovery and the lender will get full repayment.