The coronavirus outbreak is first and foremost a human tragedy, affecting the health of ever-growing numbers of people. It is also having a growing impact on the global economy. The outbreak is moving quickly, and businesses are having to react and adapt in real-time, having had no ability to plan for the depth of the economic slowdown.
There are multiple scenarios for both the spread of the coronavirus, as well as the impact on businesses. In one scenario, large-scale quarantines, travel restrictions, and social-distancing measures drive a sharp fall in consumer and business spending until the end of Q2, producing a recession. Although the outbreak comes under control in most parts of the world by late in Q2, the self-reinforcing dynamics of a recession kick in and prolong the slump until the end of Q3. Consumers stay home, businesses lose revenue and lay off workers, and unemployment levels rise sharply. Business investment contracts, and corporate bankruptcies rise, putting significant pressure on the banking and financial system. In another scenario, demand suffers as consumers cut spending throughout the year. In the most affected sectors, the number of corporate layoffs and bankruptcies rises throughout 2020, feeding a self-reinforcing downward spiral. Of course, it is also possible that a quick recovery scenario occurs, where the peak in the virus spread and public concern comes relatively soon and the stimulus and aid packages of the Government are sufficient to shore up the short-term needs of affected businesses.
We do not know which of the scenarios will play out in reality, but we do know that businesses need to be planning for each of them, potentially including some of the following steps:
- Businesses will want to consider steps to protect working capital.
- Businesses may need to conduct a business and potentially a legal review of existing credit facility documents, with a particular emphasis on non-monetary and monetary covenants that could cause a default, as well as vendor and customer agreements. If breaches of the company’s loan or other agreements are possible, it is important to be proactive and to develop a strategy to discuss standstill, waiver or other agreements with the counterparties and determine whether breaches create cross defaults in other company obligations.
- Businesses will also want to understand the value of their unencumbered assets, if any. To the extent a company has unencumbered assets, additional liquidity may be easier to procure.
- Businesses may also consider working with their professional legal and financial advisors to engage lenders in a request for forbearance agreements, extensions, additional loans or other relief. While less desirable to do so in certain instances, involving professionals in the process under the current economic circumstances may provide additional credibility to the “ask” or request to a lender for relief and may be valuable for guiding the “ask.”
- It is also an unfortunate reality that businesses may ultimately need to consider whether they need to access the restructuring opportunities afforded to them under the bankruptcy laws to obtain a breathing spell from their creditors and preserve value until the coronavirus subsides and the economy returns to whatever the “new normal” becomes.