The following is not a white paper or an invitation to participate in a webinar. It is offered as a useful checklist for businesses to evaluate potential additional credit needs and to understand problems that could arise under existing loan documents as a result of the coronavirus crisis and its resultant economic effects.
- Do projections of cashflow (income and expenses, including debt payments coming due) over the next 90 days, 6 months and one year.
- Determine short or longer term borrowing needs based on these projections.
- Review the company’s existing available credit facilities and loan documents.
- Determine what problems may exist under the existing credit documents and whether they might either preclude further advances under lines of credit or present actual or potential events of default. Potential problem areas are as follows:
a. Financial covenants:
- Is the company currently in compliance and does it expect to be in compliance for the near future reporting periods based on the financial projections? Most financial covenant measurement is based on trailing twelve-month periods, so the full effect of a business slowdown will not hit until later reporting periods.
- Will current or potential future financial covenant noncompliance (based on projections) preclude credit line advances?
b. Other covenants and loan document provisions:
- Material adverse changes in the financial condition or operations of the company (could result in an immediate event of default resulting in a loan acceleration or a potential default triggering a lender reporting requirement or providing the basis for a lender refusing to make further advances).
- Inability to make scheduled interest or principal payments per the loan document requirements.
- Covenants requiring continuity of business operations.
- Ability to extend or work-out credit to customers – Many loan documents restrict the ability of the borrower to extend credit or make loans to third parties.
- Reduction in credit line availability due to diminution of borrowing base (e.g. accounts and inventory) or triggers allowing the lender to require additional collateral.
- Ability to do additional borrowings – Loan documents may prohibit borrowing from other lenders, provide limited baskets for additional debt or condition additional borrowings on certain financial measurement tests.
- Ability to provide collateral for additional borrowings – Most loan documents will include negative covenants prohibiting or limiting the granting of liens on or security interests in the company’s assets.
- Events of default – payment defaults, material adverse changes, cross-defaults to other troubled debt, entry of judgments or other liens on assets (e.g. tax liens), failure to maintain insurance, failure to comply with all lender reporting requirements. Any applicable notice or cure rights should be understood.
- Lender reporting requirements:
- Material adverse change in financial condition or operations.
- Company’s ability to obtain an unqualified audit of its financial statements (e.g. will there be a going-concern qualification).
- Copies of management letters received from accountants.
- Commencement of litigation against the company resulting from financial problems or otherwise.
- Potential defaults.
- Lender’s ability to request other information.
- Begin a proactive dialogue with the company’s primary lender(s) to keep them fully apprised of adverse changes, financial problems being encountered by the company and the company’s plans to address them. It is generally in the company’s interest to have frank discussions with its lender(s) to keep them fully informed of adverse business developments. Lenders hate unpleasant surprises and will find out eventually when financial statements are provided or loan payments missed. Further, discuss the company’s needs for covenant modifications, loan payment forbearance or restructuring, interest rate relief and other borrowing needs. Loan document modifications will be necessary to reflect any agreed upon modifications or relief or additional borrowings.
- Explore other sources of borrowing if the company’s lender(s) will not provide the necessary additional facilities on reasonable terms. At present, the SBA is making emergency disaster relief loans available and the Pennsylvania Industrial Development Authority has recently activated a program for working capital loans to small businesses. Federal emergency relief loans may be applied for online through the SBA website. PIDA working capital loans must be run through a local economic development sponsoring body. The lending requirements of both these programs currently include the provision of collateral, so businesses looking to avail themselves of such loans may need to obtain consents from their existing lenders to the additional borrowing and the granting of the program liens. Lenders providing consents may insist on entering into inter-creditor agreements to document lien priorities, among other things.
The foregoing checklist outlines a number of potential problem areas commonly presented under borrower credit documents. However, each business’ situation will be different and depend upon the specific terms of its governing loan documents. A careful review of the company’s credit agreements with the assistance of counsel is advisable to fully understand all risk areas and to develop a plan for addressing them.