In these trying times of stiff economic headwinds, falling demand, paucity of credit, a liquidity crunch in the market, high fixed costs etc., companies are faced with serious questions about finance and investment some immediate ones being:
What is the lending scenario likely to be over the next few years? Given bank consolidation and the new IFRS 9 regulations.
How should I handle a liquidity crunch, especially vis. a vis. my banks? How can I tell them of my situation and that I may not be able to meet my commitments?
What should I do if my balance sheet has a funding mismatch – between long and short term funding of my assets?
I would like to address the question regarding the handling of banks, since it is a burning issue faced by thousands of companies in the UAE. Companies face liquidity issues for a number of reasons – carried forward losses sustained some time ago, delayed or bad debts, excessive debt, diversion of funds, unproductive fixed assets and so on.
There are four very serious issues here –
One, how do I reveal my problems to bankers – can I reveal the whole truth, however unpleasant?
Two, when do I reveal the problem to them – before or after a default in repayment?
Three, what process do I follow if I have multiple banks?
Four, 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 revealing 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 when the problem is still some time away but your company is already demonstrating stress – vide delayed payments. If you go to the bank with no delays or defaults whatsoever and tell them you will have a problem in the future, the unfortunate response will be panic and a scramble to get as much of their money back as possible in the shortest possible time.
Second, 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.
We have done numerous restructuring transactions – from AED 75 mm to AED 600 mm in size and differing complexities. Each one was different but some common threads are as follows.
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 obvious that this whole process needs to be handled with great sensitivity (there is always politics at work between various departments in banks, and this has to be carefully navigated), credibility and integrity. 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.