Months into the coronavirus pandemic, the state of US middle market companies remains unstable. After an initial round of deferrals offered by their lenders, many companies are now in an even more perilous position than they were when the downturn began. Impatient banks are bearing down on weakened companies, while those companies’ leaders scramble to cover their loans and appease their anxious shareholders. But there’s plenty of cause for hope—fixing your company’s loan issues is absolutely possible, with the right help.
How the Pandemic Changed Lending
When the pandemic reached the U.S. back in spring, many banks began offering 90-day deferrals on both principal and interest. With the economy still shaky and with no end in sight, many of those banks are now expecting a good portion of those deferred loans to ultimately default.
We’re in an unprecedented situation, and banks are behaving in unprecedented ways. In the 2007 crash, lenders had to document loan amendments and restructurings so that their regulators could track which loans were performing as a result of these aggressive restructurings (called TDRs or Total Debt Restructurings). But right now, banks can modify loans without having to report or track TDRs. And because the current economic downturn happened so suddenly, many banks just deferred borrowers en masse without necessarily evaluating the merits of these deferrals on a case-by-case basis.
This means that many of the recent loan deferrals will ultimately turn into problem loans or defaults once this deferral period has passed. That leaves a lot of companies on uneven ground. They can’t expect their banks to be proactive about addressing these loans; banks are notorious for avoiding problems in their loan portfolios. Unfortunately, it falls to individual companies to address their own defaults and problem loans.
Weakened Companies Are Overwhelmed
Many companies are struggling to stay afloat right now. While they scramble to cover payroll and benefits, adopt new safety procedures and adapt to remote work arrangements, they’re also now expected to negotiate with their lenders and satisfy their shareholders. If your company is struggling to continue operations beyond the month, navigating conversations with impatient banking institutions may be beyond the scope of what’s reasonable for you right now
A lot of weakened companies are in this same position. Their deferrals are running out but they’re not able to make their payments. They need more flexibility from their lenders but aren’t equipped to articulate their current position or anticipate what they’ll need going forward. They may need to find new lenders, but that seems like a daunting task when everything is so uncertain. Plenty of weakened companies don’t even know what their options are at this point.
Taking your questions to your lenders won’t necessarily help the company improve its outlook. Your lender doesn’t work for you in an advisory capacity, so this isn’t an effective way to get the information that will strengthen your company’s position. And doing nothing—waiting and hoping that things will improve—could be disastrous. Your employees rely on company leaders to be proactive about protecting the company’s future, and by extension, their jobs.
Move Forward with Business Advisory Services
Many weakened companies can benefit from outside help to fix their loan problems and survive this downturn. Working with professional business advisors allows a struggling company to identify all its options and strengthen its position when negotiating with its lenders. Your company leaders might not know how to start the conversation with lenders, or what they can ask of those lenders.
This is where business advisory services come in. An experienced advisor can help your company get ahead of the inevitable and prepare a cogent presentation and proposed ask for current lenders. Your advisor can also help you devise a strategic path for dealing with cranky stakeholders. With the assistance of an advisor who looks out for your company’s best interests, company leaders can stop scrambling to react and instead focus on a proactive path to survival and prosperity.
No client or opportunity is too small for LGA’s business advisory services. Corporate clients, private equity firms, family offices, banks and venture capital all have portfolio companies that can benefit from our services. We know how to fight the fight, create an offensive game plan, scour loan documents to best understand borrower rights and to help liaise with counterparties.
by Ken Segal