Financial implications & restructuring
Reduced cash flow, but also uncertainty about ability to retain assets locally, may trigger financial covenant breaches or have other implications under financing documents. We have identified also the less obvious triggers.
Capital markets, both equity issuances and new debt instruments, have closed for both new and pending deals. Syndicated bank financing projects that were not entirely committed as certain funds, have in many cases also been terminated, or stalled.
Sanctions, supply chain disruptions and market volatility may unexpectedly impact the company's financial position. Even if the company is able to absorb financial losses and limit the damage, the shock itself may trigger financial covenant breaches or other, less obvious concerns in the company's financing arrangements. And sometimes, that shock comes with a short-term spike in funding need, requiring some additional liquidity headroom. Either way, it is prudent to look beyond the immediate issue to the potential dominos behind it, and assess whether funding lines will remain stable, reliable (open) and legally committed. Financial implications tend to result in either of two issues: a covenant breach or a liquidity shortfall. The covenants most likely to be breached relate to the following:
To assess whether a liquidity shortfall is likely to occur, bank will in almost all cases ask for a 13-week liquidity forecast showing the liquidity headroom of the company or the group. This chart shows the expected development of liquidity (including committed revolvers or overdraft facilities but excluding uncommitted lines) in each of the next 13 weeks (by week-end). It allows the board to decide whether or not to postpone certain payments or to accelerate collection of receivables. More importantly however, this chart allows the management board to initiate discussions with banks as it is one of the first things banks request when asked to provide additional headroom.
Capital markets, both equity issuances and new debt instruments, have closed for both new and pending deals. Syndicated bank financing projects that were not entirely committed as certain funds, have in many cases also been terminated, or stalled. Only smaller bank financing deals, as well as direct lending (credit fund) deals, are continuing as before. We have not yet seen MAC (Material Adverse Change) or other clauses in drawn-financing being called. However, we do experience that financiers drag their feet in yet-to-close M&A deals, discretionary financing and capital expenditure financing. As for bonds, they typically require a credit rating. If the rating has not yet been obtained, the ratings processes are currently on hold or very slow. However, if a credit rating has already been obtained and is not up for renewal, we have not seen the rating agencies proactively reaching out (yet). . It is key to face this unwillingness of financiers head-on by preparing various scenarios and plan A, plan B, plan C etc. and to imitate discussions with financial and legal advisers. This allows the managing board to show the company's financiers that the board is in control.
Occasionally, the lenders may try to pressure the purchaser to terminate the SPA, or otherwise pull out, on the basis that a draw-down of funds to close the transaction would be unpermitted use of the facilities, or some comparable argument. If the company does want to seek a way out, it is key to stay in control of the narrative. Communication with the financier, the seller and the target company has to be coordinated from the new perspective. Several aspects, that were not in play before, are now of mounting importance. One of the main things to keep in mind is to prevent giving cause to liability claims by the seller or target towards the company (or its management board). Furthermore, the company has to prevent giving rise to the allegation that it is in default itself (creditor's default) and can therefore not rely on any default from the seller-side. To stay in the driver's seat, and control the narrative, requires advanced preparation prior to any communication with the seller or target on the topic of halting the deal.