The coronavirus is spreading rapidly in Australia and the impact it’s had on local businesses have been devastating. Business owners and employees are experiencing financial difficulties and many are feeling lost throughout the whole process. But when armed with information, you can make better financial decisions to help sustain your needs now and in the future. If you need additional support you can speak with experts like Sterling Debt Advisory. Keep these practical tips in mind to weather the financial storm brought by the pandemic.
Both markets of the debt capital market (DCM) and equity capital market (ECM) remain closed and it appears that there is little to no interest in raising debt or equity given the market’s current condition. Some of the recent corrections we’ve witnessed in equity capital markets are share prices that have dropped significantly with levels comparable to the 2008 GFC. This puts underwriters in an awkward position when underwriting capital raising with an extended timetable. Any underwriting done under these situations is likely to be quick in the market, with short settlement periods and/or low discount rates.
The market for private credit remains open, particularly the private debt funds. With more than enough committed capital to use, private credit funds are flexible and can co-exist with any existing capital structure that companies have in place. This makes private credit funds ideal for short-term solutions that can be refinanced once the economic activity goes back to normal.
While private credit is not a cheap asset, it’s better than losing money while your business is weathering the storm. Provided that you opt-out on non-call periods or other restrictions on early payment, private credit funds are a flexible solution that you can replace immediately once the crisis has slowed down.
Australian corporates are approaching liquidity quite differently. Some choose to defer from debt issuance and borrowing decisions while others are depleting undrawn term/ revolving credit facilities while sourcing as much debt as possible from the market. For companies who are looking to obtain as much liquidity as they can, we recommend acting sooner rather than later before financing options become limited. Some of the financing options for Australian borrowers are:
- Undrawn debt facilities – While any undrawn term/ revolving credit facilities are some of the best ways to turn to liquidity, the ongoing coronavirus pandemic may cause defaults (including but not limited to MAE) and these defaults can potentially hinder you from accessing such facilities.
- Amend and extend – Many Australian borrowers are starting to utilise amend and extend to lengthen the maturity date of their loans. The extending lenders usually receive a higher applicable margin on their extended loans and may receive additional compensation like amendment fees and commitment fees.
During these circumstances where banks are interested in meeting their existing obligations, they are more likely to be amendable if approached ahead of time before any expected credit crunch occurs.
New Bank Debt
Despite the circumstances, most banks will continue to seek as much bridging facility opportunities they can find for their core clients who’ve set aside long term plans such as US private placements, ECM/DCM issuances, or the completion of pre-committed M&As. Credit committee standards are still fairly at the moment, but we do expect bridging opportunities to open up to Australian corporates who are up there in terms of the credit spectrum.
Existing financial considerations
We highly recommend Australian borrowers to review their existing financial agreements to evaluate the impacts of the coronavirus pandemic now and in the future. Some important questions worth asking are:
- Material Adverse Effect – Check your MAE definition. It is capable of being activated by your lenders?. While lenders may be reluctant in triggering an event of default based solely on MAE, they may use it as a draw-stop to accessing undrawn term/ revolving credit facilities.
- Financial covenants – How will the coronavirus pandemic affect your business/ revenue? Will it impact your business to an extent that your agreements are likely to be breached?
- Representations/ undertakings/ events of default – Are you capable of repeating your representations at the times specified in your loan agreement? Are they still true and can you still comply with all the undertakings and events of default in the agreement? What are the grace periods do your representations, undertakings, and events of default benefit from?
- Reporting – How will the pandemic affect your ability to comply with your information undertakings? Is there an existing or potential default on your end? If so, when should you disclose it to your lenders?
- Waivers – Do you need waivers for your existing and upcoming defaults? What are the mechanics and voting thresholds for acquiring a waiver?
- Risk of insolvency – Is your business at risk of insolvency? What do the cash flow projections look like?
The impacts on revenue brought about by this crisis may very well endanger cash flow solvency for otherwise stable businesses. Insolvent trading laws that are applicable to directors are generally onerous in nature and is unlikely to assist during this difficult time. However, the safe harbour from insolvent trading (which was enacted in 2018) can serve as a potentially evasive action for companies who are interested in trading during this period. Think about whether or not safe harbour measures should be exercised as part of your financing/ refinancing plans.