Over the past few months, the COVID-19 pandemic has severely affected the world economy. During the financial downturn, companies in the Netherlands have been busy ensuring adequate levels of liquidity and cash flow through a variety of sources. Where some companies opted for government support schemes – in particular the Dutch business finance guarantee scheme known as "GO-C"– others were able to use their revolving lines of credit or to turn to the debt capital markets. In this article, we reflect on these alternatives and provide practical insight based on our experience.
DrawdownsAfter brewer AB Inbev drew USD 9 billion under their RCF at the beginning of the COVID-19 pandemic, many companies followed suit. Even those with apparently sufficient liquidity drew on the full amounts available under their credit lines, to ensure adequate levels of available cash in anticipation of a deepening global recession. The main reason for this precaution was that companies were afraid they would not have access to cash when needed because of:
- potential future draw-stops as a result of financial covenant breaches or other defaults (for example, cessation of business); and
- potential inability of lenders to fund as a result of the economic downturn.
Amended financial covenantsAs a result of the pandemic, many companies are faced with a significant decline in their EBITDA. Since most facility agreements include financial covenants calculated on the basis of EBITDA, these companies have had to negotiate with their lenders to resolve this issue. This has been dealt with in a number of ways, including:
- waiving breaches of the relevant financial covenants for a certain period;
- resetting the relevant financial covenants permanently or for a certain period;
- adjusting the definition of EBITDA in ways that prevent financial covenants from being breached (for example, using historic figures or the newly invented EBITDAC - earnings before interest, tax, depreciation, amortization and COVID-19);
- replacing covenants, mostly by minimum EBITDA or minimum liquidity covenants; or
- a combination of any of these options.
GO-C in practiceIn addition to making use of existing facilities, many companies have been looking for additional funding alternatives. The Dutch government introduced the GO-C scheme which enables lenders to obtain a state guarantee of 90% on medium-sized loans, and 80% on large loans provided to Dutch companies. After its introduction, the GO-C scheme was swiftly perceived to be a reasonable and accessible solution for companies facing difficulties as a result of the pandemic. The Dutch government has not yet published figures on the number of applications, successful or unsuccessful, for the GO-C scheme. In practice, we have seen companies face various issues when obtaining GO-C guarantees, such as: Strict interpretation The GO-C scheme contains a number of eligibility criteria and practice has shown that the Netherlands Enterprise Agency (RVO) is strict in applying those criteria. We have so far noted a relatively high focus on whether or not a company: (i) has a substantial part of its business in the Netherlands, where the rule of thumb is set at 50% of company turnover, (ii) is sufficiently profitable, and (iii) has reasonable continuity prospects, with attention paid to a company's debt ratios. No direct involvement The lenders have to make the actual application to obtain the GO-C guarantee and they also entertain the related discussions with the RVO. As such, companies are in general not directly involved in any of those discussions and may lose control over the process itself. Shareholder support required In several instances, RVO required shareholders to support the requesting company by providing equity or other funding first, with the GO-C serving as backstop to bridge the gap. In situations where shareholders were not willing or able to meet this requirement, GO-C applications were typically rejected. No imminent liquidity need Companies that applied for the GO-C to cover for potential future liquidity requirements were also turned down. To avoid spending time and resources on negotiating and documenting the specifics of the required loans, companies should assess the likelihood of obtaining the state guarantee upfront. Companies that are considering applying for the GO-C scheme are advised to:
- discuss the potential application with their legal counsel and – importantly – with their lenders before starting the process, so that any expectations can be managed and insights can be shared. In some cases, it will be clear in advance to their legal counsel or lenders that an application is likely to be unsuccessful;
- ask their lenders to entertain preliminary discussions with the RVO, possible joined by the company itself. The RVO may be able to provide its preliminary views on the likeliness of receiving a state guarantee under this scheme; and
- keep in mind that the deadline to apply for the GO-C scheme is 15 December 2020.