Don’t delay: Advance preparation will be key to successful debt facility review processes

With a backdrop of significant rationalisation in the Tech industry, the continuing impact of Brexit, the fallout of Covid 19, inflation, the increase in interest rates, the war in Ukraine and consequential impact on energy and material costs, it seems dark clouds are on the horizon. Irish businesses can however take some comfort from the recent IBEC report and the European Commission predictions that economic activity in Ireland will slow significantly although, importantly, that Ireland will escape recession, unlike most of our trading partners within the bloc. Prudent business’ will be conscious of a likely slowdown and revised outlooks, reduced market confidence and a wary consumer base will serve to test even the most resilient Irish businesses. The importance of planning and keeping your lenders up to date as to current performance and strategy moving into this challenging period will be key.  

Irish SME & Mid Cap companies are not immune to broader market reactions and so need to investigate how the macro issues referred to above impact on their business. In the context of debt facilities, macro level issues can affect costs, currency exposure, availability and lead to potential supply chain delays. Certain metrics in terms of assessing the impact of macro issues could include the discretionary nature of the business, exposure to trading partners in the UK, EU and further afield and supply chain availability.

We have set out below some suggestions to assist in this planning process:

Plan for the worst and hope for the best - revised projections

Lenders need to be equipped with up-to-date statistics and forecasts as to business’ performance but also provided with details as to the company’s strategy to manage risk and to capitalise on opportunities in this challenging economic environment. Depending on the nature of the sector which the business is operating in, macro factors may have minimal impact though where real risks are identified, demonstrating that action has been/will be taken to manage, mitigate or pivot from particular risk areas of the business will be important. This will provide comfort to lenders as to company’s resilience and will inform the best approach in terms of re-designing suitable covenants and reporting requirements to afford the appropriate level of flex. 

Review financial covenants and reporting requirements

As CFOs will be aware revisions and reductions in terms of both growth and margins will test business’s ability to comply with existing financial covenants. As part of the diligence exercise it is necessary to consider existing covenants and to identify pressure points. An open discourse with your lender around this will allow for discussion around adjustments to covenants and possibly, reporting requirements. It is important to ensure that reporting is sufficient to meet your lenders needs while avoiding the creation of an overly onerous mini-industry, taking vital time from key people who could otherwise be focused on running and building business. What is key here is to instil confidence demonstrating you understand the key metrics required and the adequacy of proposed reporting.

Review costs

In addition to the assessment of how macro issues are likely to affect the business, it is important to also assess the day-to-day costs of the business. In order to remain compliant with your debt arrangements it may be necessary to restrict payment of dividends or other non-essential outgoings based on performance of the business. In these unsettled times, it is important to be fully aware of such restrictions to avoid inadvertent covenant breaches. As part of the review process, lenders could look to tighten anti-leakage covenants and so it may be worthwhile getting ahead of this.  

Rising interest rates and currency exposure

As we emerge from an unprecedented period of low to negative interest rates CFOs of both domestic and international companies will be conscious of both currency exposure and increasing interest rates. In the context of facilities with exposure to other currencies pre-hedging in advance of transactions and hedging strategies during the life of facilities should be considered to manage transaction risk on foreign currency loans. The simple message here is to maintain open lines of communication with your lenders to best manage these exposures both on a domestic and international front.  

Review your capital stack

Taking on investment at a point when the market is slowing down may seem counterintuitive but in certain instances if an opportunity for the acquisition of a distressed competitor or to alleviate pressure from a debt management perspective it may be the right option for your business. The lending landscape in Ireland has significantly diversified and there are now more sources of funding and options available in Ireland more than ever before whether by way of strategic equity or quasi debt/equity structures and so this should form part of holistic considerations.    

Conclusion

While sentiment in the Irish market remains positive, we are not immune to global shifts which are already having an impact on Irish businesses, both domestically and those operating on an international level. Demonstrating to lenders that you are managing with an informed holistic, prudent strategy will be key to successful negotiation of amendment of the terms of existing debt facilities or indeed engaging with new lenders.  

There continues to be confidence in the growth of the Irish economy with the expectation that strong, resilient Irish business will continue to perform well. Preparation, planning and open lines of communication will each be key factors for Irish businesses to successfully navigate the unsettled times ahead. Proactivity rather than reactivity is key.

For more information please contact our Banking & Finance Team

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