Engaging with existing lenders during the coronavirus crisis

The current coronavirus pandemic has had a number of disruptive effects, which have multiplied in impact over recent weeks. In these turbulent times, many businesses will need to turn to their lenders for support.

But your existing lenders will still expect you to have explored all options for reducing costs and boosting cash flow, including assessing your eligibility for Government support, before you approach them.

Read our guide to preparing to engage with lenders during the coronavirus crisis for the three-stage process that we recommend.

Access to finance: an overview of the market

Our recent conversations with the lender community have highlighted a number of common themes regarding attitudes to and appetite for lending at this time. Before you prepare to engage your lender, it’s important to understand how lenders are reacting to the coronavirus crisis. Here’s what we’ve found:

  • Banks are focused on their existing customers rather than taking on new business
  • At the beginning of the crisis, banks engaged in a triage process, dividing companies into two categories:
    • those with an immediate cash requirement that needed to be addressed; and
    • those who had more headroom available and are engaging on the basis of contingency planning.
  • In either case, whilst the pandemic will be seen as an exceptional shock, lenders will still need to apply their due process of assessing whether the business remains viable.
  • Banks will look at anything that is put to them on its merits and do what they can by way of being supportive.
  • Debt funds are responding positively, particularly those with special sits experience – see our guide to approaching new lenders.

Government loan schemes and support

The Government initially announced two separate measures aimed at supporting the continued provision of finance to UK businesses during the coronavirus outbreak: the Coronavirus Business Interruption Loan Scheme (CBILS) and the Covid Corporate Financing Facility (CCFF).

The CBILS is open to companies with an annual revenue of up to £45m, and the CCFF is open to large companies rated ‘investment grade’ or ‘investment grade equivalent’ who ‘make a material contribution to the UK economy’.

Following criticism that many mid-sized businesses were falling into the gap between the two schemes, the Government launched a third scheme, called the Coronavirus Large Business Interruption Loan Scheme (CLBILS), available for businesses with an annual turnover of over £45m. Similarly to the CBILS, the CLBILS will provide a Government guarantee of 80 per cent and any such loans backed by a guarantee under CLBILS will be offered at commercial rates of interest. 

Two further schemes for businesses at the smaller end complete the set, the Bounce Back loans of up to £50,000, and the Future Fund convertible loans of up to £5m. 

The Government has also announced a number of other measures, such as the deferral of VAT payments and the job retention scheme, as well as others aimed at specific sectors.

Read our summary of the Government measures to understand your options.

Engaging with your lender: practical considerations

Companies should focus on addressing how they will approach their existing lenders. Given the hurdle of the viability of the credit will remain in place, any additional relief or benefit afforded by Government-backed schemes can be seen as a complementary upside.

Taking action prior to a cash shortfall or covenant breach gives you greater control over the process and the options available.

Options available in anticipation of a cash shortfall / covenant breach

Relief that doesn’t involve 'new' money is likely to be easier and quicker to sanction, such as: 

  • covenant resets;
  • suspending loan repayments; and
  • terming out of drawn ABL and revolving loans.

Where the medium-term viability of the credit quality can still be demonstrated, a new or increased short term facility should also be available, either as part of one of the Government schemes or on a standalone basis.

Where it is deemed the business can no longer support the level of existing debt, a more fundamental change to the capital structure may be required, including a debt-to-equity swap or an equity injection.

Gives vs asks

When you are engaging with lenders on the basis of a new ask, you should be prepared for a discussion on all key terms of the facility, which could include:

  • an amendment fee;
  • the margin and overall fees;
  • the repayment profile;
  • cash flow sweep requirements;
  • mandatory prepayment requirements;
  • capex limits / restrictions;
  • limits on acquisitions, disposals and dividend allowance; and
  • additional security from the group, where available.

Benefits of re-engaging with lenders

  • Avoid an imminent cash shortfall or financial covenant breach.
  • Agree a revised repayment profile and set of financial covenants that provide sufficient headroom going forward to enable the management team to focus on operating the business effectively.
  • Revisit any other commercial terms which are no longer appropriate.

Preparing to engage

To discuss your financing position effectively with your lender, it is important that you are armed with the necessary information on a pre-emptive basis. 

  • The 'fully funded covenant case' needs to be well-defined, with no cash 'gaps'.
  • Consider the content and presentation of information necessary to demonstrate the credit strength of the business to lenders.
  • Unlike a new deal, the lender should be approached with a complete proposal with opening positions on all topics, including pricing.
  • Where an equity contribution is available, you should consider how to optimise the use of the equity funding, as well as the proposed mechanism on how the injection will be repaid.

How RSM can help

Across our debt advisory, corporate finance and restructuring advisory teams, RSM has built considerable expertise in assisting clients negotiate with lenders. We are here to help you in all aspects of your engagement with lenders, from strategic review and tactical discussions to financial analysis and presentation of the credit case.

For more information, please contact

Gregory Moreton Greg Moreton

Partner, Head of Debt Advisory