It goes without saying that the COVID-19 crisis is an unprecedented global economic event. In some sectors (e.g., travel and hospitality) business activity ground to a nearly complete halt virtually overnight. The drastic and unforeseen contraction in demand for products and services will put an immediate and severe cash constraint on corporate borrowers everywhere, impairing their ability to make debt service payments in the short term and, for many, repay or refinance loans in the long term.
Corporate borrowers should remember two things:
- Everyone – your lenders included – is in crisis-management mode for the time being. Attention and energy are being devoted to assessment of immediate threats and enterprise-saving measures. Until the duration and full extent of the crisis and the resulting impact on the economy become clearer, we are all in the same remarkably unstable boat and just trying to keep our footing.
- Although initial government action has focused on providing relief to consumers, legislators and policymakers are coming around to relief efforts for businesses. For example, the Federal Reserve and other U.S. regulatory agencies recently announced measures that will allow banks to modify loan terms, such as by reducing interest rates, deferring payments, waiving fees, and extending repayment terms, without necessarily having to label those situations as “troubled debt restructurings” under applicable regulatory guidelines.
Tips for Working With Your Lenders
Regardless of how and when things finally come into clearer focus for your business, in the near term there are three principles you should follow in dealing with your lenders:
- Communication. In my many years of experience representing banks, commercial mortgage servicers, and other lenders in distressed loan scenarios, there has been one common theme. Borrowers who communicate regularly are more likely to gain the trust of their lenders, and lenders are more likely to grant accommodations to borrowers they trust. Don’t wait for your lenders to call you – reach out yourself and start the discussion.
- Transparency. Be completely transparent with your lenders and share all information relevant to your financial situation, both good or bad. If your lenders believe you are misrepresenting or concealing the true state of affairs with your business, or just putting your head in the sand, they are more likely to assume the worst and act accordingly to mitigate the risk to their own bottom lines. Conversely, if your lenders believe you are being completely truthful and transparent, they will be more likely to work with you on the understanding that times will be tough for everyone for the immediately foreseeable future.
- Proactivity. Have a plan of action that is realistic under the circumstances, even if it is a fluid one (as it will almost certainly have to be). Imagine you are a bank relationship manager navigating these choppy waters and you are getting the following messages from Borrower A and Borrower B:
Borrower A: “Obviously we are facing a tremendous amount of uncertainty, but we are trying to anticipate and plan as best we can under the circumstances. Although we are expecting a drop in revenue of as much as ___% for the foreseeable future due to ___________, we are thinking creatively about new ways to generate revenue such as _________________. We are hoping things may start to turn around for us as early as _________, based on _______. In the meantime we are doing everything we can to minimize expenses without impairing our ability to meet customer needs and get back to full capacity when things start to normalize, including __________.”
Borrower B: “We’re tapped out and we have no idea what to do. Please help us.”
Borrower B is no less sympathetic than Borrower A, but I’ll leave it to the reader to guess which one is more likely to get a favorable reception in any loan modification or forbearance discussions.
Following these principles will not ensure favorable treatment, but it will enhance trust and maximize your chances of negotiating short and long term solutions that work for you and your lenders. Failing to follow them could make an already challenging situation unnecessarily grim.
For more information, please contact me or your regular Parker Poe contact. You can also find the firm's additional alerts related to the coronavirus pandemic here.