In these trying times of strong economic headwinds, posed by falling demand, paucity of credit and liquidity in the market, high fixed costs and so on, companies are faced with serious questions of survival. There are many questions to be answered on this front, but a critical one addressed in this blog is:
How should I handle a liquidity crunch and how should I handle this vis. a vis my banks? How can I inform them of my situation and tell them that I will not be able to meet my commitments?
Companies face liquidity issues for a number of reasons – old carried forward losses, delayed or bad debts, excessive debt, diversion of funds, unproductive fixed assets and so on. A combination of these may well require a comprehensive restructuring of all debt with banks.
However, there are four serious issues here:
- How do I reveal my problems to bankers – can I reveal the whole truth, however unpleasant?
- When do I reveal the problem to them – before or after a default in repayment?
- What process do I follow if I have multiple banks?
- How might they react – each bank has a different policy.
Each company’s situation is different but here are some common threads. First, the extent of the problem needs to be assessed before deciding the strategy of how to reveal the problem. Bankers want to know the truth, but for a variety of reasons, may not be able to digest it, if suddenly thrown at them. Extreme caution is called for. If the problem is large enough to warrant a restructuring of your liabilities, then the time to approach banks is well before the current “deferral holiday” is over.
First, the approach to banks has to be on an one-on-one basis with a careful selection of which bank you approach first – each has a different tolerance for this sort of situation and will react differently. The only common denominator is that banks, in general, have become more understanding and want to work with clients to avoid losing money. However, considerable skill and knowledge of the inner workings of a bank are still required to navigate this dangerous landscape. A common solution needs to be proposed to all banks, but it has to be done on a bilateral basis. Joint lender meetings have never worked, and banks privately acknowledge that they do not have any faith in JLMs.
We have done numerous restructuring transactions – from AED 75 mm to AED 700 mm in size and of differing complexities. Each one was different but there are commonalities: One, unless it can be proven 100% that a restructuring has been necessitated by genuine business problems, banks tend not to believe any other explanation and rapidly lose trust in the owners.
Second, banks want a clear explanation of what went wrong and how this will be fixed, together with credible projections, cash flows etc.
Third, from our experience, they want to have bilateral discussions with the client – not a joint lender meeting, which do not really work. They therefore look for someone with a high level of credibility with banks, to prepare the information and coordinate and drive the initiative with all banks.
Last, but not the least, they want assurances that no bank will be unfairly or unequally treated, and that some parity must be ensured. We have seen restructurings fail for one or more condition not being fulfilled.
It is therefore very obvious that this whole process needs to be handled with great sensitivity. Chances are, that the bank will not trust the borrower to do this and strongly prefer a professional advisor who is known to and trusted by banks. You will be well advised to therefore seek professional advice, when you see trouble on the horizon, and not when you are already sinking with past dues and delayed payments. A professional will help you prepare for the eventual crisis and advice on how to handle banks carefully and with sensitivity.