Covenant breaches and how to stay aligned
/Breached covenants have been common in 2020 as borrowers and lenders manage reductions in revenues and asset values. Covenant waivers have been agreed for the months, or quarters, from March until now with Q4 looking like a convergence of issues as the COVID pandemic drags on. If you are in breach then bear in mind, there are many other borrowers in a similar situation and the situation is as much a problem for the lender as it is for the borrower.
Engage with your lender early and set out both positive and negative scenarios. An improving position is much easier for underwriters to digest and support.
Sensitise forecasts: extend timescales, increase capital cost & sharply reduce revenues. Funders are used to borrowers trying to be optimistic, be realistic.
Consider both solvent and insolvent options to protect shareholder value. The passing of time can lead to a problem being compounded by the accumulation of default interest, extension fees and capitalised historic interest.
Personal Guarantee (PG) enforcement can vary dependent on the specific terms documented. If you have a PG then ask your solicitor to review the agreement early. Lenders usually don’t want to enforce PGs and, in many cases, they are settled for less than their sum but they will enforce if a) borrower conduct is poor b) they have no other options.
Unlike during the Global Financial Crisis, lenders now have greater pressures and also greater liquidity (which doesn’t necessarily mean they have more to lend). Various dynamics influence how lenders are approaching breached covenants; regulatory overview, increased competition, borrower conduct, social media and improved tier one capital liquidity. The lack of active non-performing loan (NPL) portfolio buyers is also a factor, as lenders are now more likely to have to work out their difficult situations themselves than sell their defaulted loans to private equity investors.
The current landscape for property finance in the UK is much more diverse than it was in 2008. Regulatory reform previously spawned a spate of new funders with many of the current debt funds, bridging finance, development finance and non-retail bank lenders having fixed volumes of liquidity and no inflows from savers seeking deposit returns.
Recently, we have seen a range of methods used to ease covenants; new loan facilities agreed on a longer profile, covenants re-negotiated based on revised projections, monthly/quarterly covenant waivers agreed for up to 12 months, unpaid interest written off and mezzanine finance raised to aid cashflow. Being realistic is critical to maintaining solvency.
Jamie Davidson, Managing Director
07919 863 034
“Being realistic is critical to maintaining solvency.”