COVID-19 and the management of financial and contractual liabilities
Considering the current state of the crisis generated by COVID-19, a structured liability management can add value to the company’s activities. For such management to be effective, there must be a careful analysis of contracts, tax issues, accounting, business/strategies and disclosure – to publicly traded companies – matters. Also, it must be done in an organized manner so that all relevant aspects are evaluated. We highlight some of the aspects below:
- Change of interest or principal payment dates;
- Renegotiation of financial covenants;
- Obtaining waivers before any default occurs, avoiding “cross defaults”;
- Understanding procedures and quorums required for approval of contract modifications;
- Possible need for collateral reinforcement in exchange for creditor concessions.
- A careful assessment of the company’s current cash position, the expectation of future spending and the projection of expected revenue in a crisis environment are fundamental attitudes for a quick and efficient decision process. If it is necessary to renegotiate some type of contract, whether with financial creditors or suppliers, a rapid mapping of the largest liabilities and a proactive attitude can avoid (i) the deterioration of the economic situation of the company and (ii) a future scenario in which an eventual renegotiation takes place with more urgency and with less favorable terms.
- It is essential to analyze all financial contracts signed by the company, even those with longer terms, evaluating which contracts contain clauses that may cause early maturity in debts due to noncompliance with financial covenants or due to the paralysis of activity of the company. As an aggravating factor, the occurrence of any of these events may generate the early maturity not only of the debt in which the default occurred, but also the early maturity of several other debts of the company because of a “cross default”.
- Regarding syndicated loans, it is important to understand what is the quorum of creditors to obtain a prior waiver in order to avoid the occurrence of an event of default or to approve changes in the payment terms of the debt.
- The analysis of the creditor chart is also fundamental to determine the strategy that will be adopted to obtain the approval of any claim. It is important to remember that there are creditors who are more receptive to such requests because they want to maintain a long-term relationship with the company and there are creditors with short-term interests who may even want to receive their resources as soon as possible to strengthen their own cash position.
- It may be necessary to offer guarantees or to reinforce the current guarantee package in order to facilitate the approval of a term extension, a waiver or any other request made to a lender. For this reason, the company should also evaluate in advance what assets are available. Another hypothesis that may be worthwhile is to seek a bank guarantee to guarantee all or part of the debt that needs to be renegotiated. Although a bank guarantee has a cost, it might be desirable to incur such an expense if a significant amount of existing debt can be rolled over and there are no other assets that can be offered as collateral.
- Companies with a strong cash position can also take advantage of the crisis for financial gain. For example, companies that have debts being traded on the secondary market at prices lower than face value may try to acquire such securities benefiting from immediate discounts.
The Lefosse team is following closely the updates on the legislative scenario and remains available to assist our customers and ensure quality information to the general public.
For more information, please contact:
Roberto Zarour Filho
Cel.: (+55) 11 9 9420 4900
Tel.: (+55) 11 3024 6340