In March 2020, Chris Glenos reviewed how the global coronavirus pandemic has thrown businesses of all sizes into a state of upheaval and how lenders must now brace for the impact on their business borrowers.
Glenos highlighted five industry sectors that were predicted by a report from PricewaterhouseCoopers (PwC) to experience significant financial disruption in 2020. These sectors include:
Glenos explained that the disruptions caused by the coronavirus pandemic have exacerbated pre-existing issues, leading to a domino effect across multiple sectors. Additionally, an oil price war has compounded the difficulties faced by the energy sector.
In response to the ongoing crisis, lenders must evaluate which borrowers are most at risk. Borrowers already in default on payments should be a primary concern. Glenos noted that those operating within distressed industries such as retail—where many businesses have halted operations—may require closer scrutiny.
After identifying potentially troubled borrowers, lenders should thoroughly assess each business’s financial health. Many loan agreements require borrowers to provide regular financial reports and adhere to financial covenants. Glenos explains that this information can quickly become outdated. Therefore, he recommended that lenders use provisions in loan documents that allow them to request updated financial data from borrowers.
When seeking updated information, lenders should focus on data that is readily available and indicative of the borrower’s current financial state. Glenos suggested reviewing key pieces of information, including:
Once a lender has compiled a watchlist of at-risk borrowers, the next step is to triage them based on their financial stability. Glenos explained that this involves assessing whether a borrower can endure the economic shock brought about by the coronavirus.
Some businesses will possess the necessary financial resources to weather a temporary shutdown, while others may not. Glenos pointed out that the availability of liquid assets is a critical factor. Additionally, lenders should consider both short-term and long-term industry projections. Monitoring government assistance programs for borrowers is also essential, as such aid could help sustain businesses until they can resume normal operations.
Lenders will find that many borrowers are in default, with payment defaults being the most apparent. However, businesses not in payment default may still be in breach of covenants or subject to material adverse change clauses commonly found in loan agreements. The financial data collected from borrowers can help lenders determine whether such defaults have occurred.
Healthy borrowers facing temporary disruptions are likely candidates for loan extensions or forbearance agreements. This period provides an opportunity for lenders to review and possibly amend loan documents, correct any past errors, or strengthen their collateral positions.
For less stable borrowers, lenders may have no choice but to take action to preserve value. Potential remedies include initiating receiverships, direct collection of receivables, foreclosure, or litigation.
As the coronavirus pandemic continues to impact the global economy, lenders must remain vigilant and proactive in managing their portfolios. Chris Glenos emphasizes that by understanding which borrowers are most at risk, assessing the ability to withstand economic shocks, and considering strategic options, lenders can better navigate these challenging times and help their borrowers recover and thrive.
