Like most companies, you are preparing for how COVID-19 might affect your operations. Equally as important:  the conversations you should be having with your borrowers that range across multiple industries and sectors.  How is COVID-19 likely to impact their business? Are they proactively analyzing and implementing protocols to reduce costs, and better ensure continuity of supply?

These conversations, if approached correctly, can provide an opportunity to learn more about your customer’s business, while simultaneously pinpointing concerns that might affect their livelihood. And this crisis presents an opportunity to provide guidance and support to your customers, beyond the typical lender/borrower relationship.

While there are individual issues which may arise for each borrower, there are categories of questions which apply across the board:

General Questions:

  • What is the customer’s “disaster” recovery plan?
  • How would the borrower handle a “quarantine”?
    • Can obligations be met with employees working remotely?
  • Will the customer need to put any employees on leave?
    • If so, what are the applicable notice and other obligations?
  • Is the customer dependent on employees in other countries or other areas disproportionately affected by COVID-19?
  • Does the customer see any opportunities to increase revenue or expand the business?
    • If so, will they need any additional funding?
  • Conversely, is the customer committed to a sell-side transaction which is at risk of not closing?

Loan Specific Questions:

  • Are there any covenant risks?
  • Is there any other likely defaults?
  • Are there any risks specific to asset based lending (ABL)?
  • Are there any borrowing base issues, g. AR aging?
  • What is the source of the borrowers customer base and likelihood of being significantly impacted?

Operational Issues:

  • Has the borrower undertaken to identify suppliers facing financial risk or an inability to deliver?
  • Is the customer dependent on frequent and rapid delivery of “parts” or product?
    • If so, what measures are being taken (if any) to anticipate a delay in those deliveries?
    • How long can the customer continue ordinary course operations if there is an extended delay in deliveries?
    • Does the customer need additional working capital to stockpile essential inventory?
    • Does the customer have insurance to mitigate any adverse effects?
  • Is the customer obligated to deliver product on a frequent and/or expedited schedule?
    • If so, are there contractual “outs” which will avoid or mitigate damages for failure to meet such schedules (like a force majure clause, for example)?
    • And again, is there insurance to mitigate damages for any defaults?
  • Is the customer a party to significant contracts that would allow the counter-party to cancel or delay payments under certain conditions?
    • If so, under what conditions?
    • Will the customer need additional working capital to address any delays in payment or performance.

While no one can predict the extent of disruption that COVID-19 might cause, industries that rely on third parties to provide goods or services are already seeing revenue disruption, and some suppliers likely will be unable to economically weather the storm. To get a jump on how it will affect your customers—start having the right conversations now.

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Photo of Deborah D. Williamson Deborah D. Williamson

Deborah Williamson serves as the leader of Dykema’s Financial Review Committee and has practiced insolvency and restructuring law for over 30 years. Ms. Williamson is regularly called on by clients in a variety of industries for her bankruptcy experience and advice regarding counter-party…

Deborah Williamson serves as the leader of Dykema’s Financial Review Committee and has practiced insolvency and restructuring law for over 30 years. Ms. Williamson is regularly called on by clients in a variety of industries for her bankruptcy experience and advice regarding counter-party risk. She served as one of the 19 members of the American Bankruptcy Institute’s (ABI) Bankruptcy Reform Commission. She was the second recipient of the ABI’s Lifetime Achievement Award. In 2019, Ms. Williamson received a lifetime achievement award from the San Antonio Business Journal. Based in San Antonio, she travels frequently around Texas, the United States, and the world to address colleagues and counsel clients on bankruptcy issues and trends.

In 2016, Williamson authored the second edition of When Gushers Go Dry, The Essentials of Oil & Gas Bankruptcy to address new realities in the oil fields, the first guide to oil and gas bankruptcy. She had previously co-authored Bankruptcy Litigation for the Commercial Litigator. Ms. Williamson has been named a leader in her field by Chambers USA since 2003, previously selected for inclusion by Texas Super Lawyers as one of the Top 100 Lawyers in Texas (regardless of practice), as one of the Top 50 Women Lawyers in Texas and she has been named as one of the Top 50 Lawyers in Central Texas since the honor’s inception. Named one of The Best Lawyers in America© consecutively for over two decades. She has served as Co-Chair of the Bankruptcy and Insolvency Litigation Committee of the Litigation Section of the American Bar Association and Chair of the SBOT Bankruptcy Law Section. Ms. Williamson formerly served as Managing Director of Cox Smith prior to its combination with Dykema and was responsible for guiding and shaping the firm’s business and client service strategies.

Photo of Sheryl L. Toby Sheryl L. Toby

Sheryl Toby (Member) has substantial experience in two unrelated fields. First she regularly advises manufacturing entities (such as automotive clients) in a wide variety of day-to-day supply chain matters. In both traditional and advanced technology manufacturing, she focuses on legal requirements within the…

Sheryl Toby (Member) has substantial experience in two unrelated fields. First she regularly advises manufacturing entities (such as automotive clients) in a wide variety of day-to-day supply chain matters. In both traditional and advanced technology manufacturing, she focuses on legal requirements within the context of practical application. She works closely with purchasing groups, in-house legal, finance and other business teams in developing strategy for addressing business challenges that intersect operational and legal issues. Her vast experience spans across matters such as, development of unique collaborative agreements in advanced vehicle manufacturing, front end procurement contracting best practices and addressing “stop-ship,” financially troubled suppliers and other litigation threats. She is often called upon by entities to strategize with and lead experts in a variety of other disciplines to address unique challenges faced by companies in highly regulated manufacturing based industries including, for example, internal investigations of safety issues and other matters. Second, Ms. Toby is a prominent bankruptcy and restructuring attorney with over 30 years of experience. She is known for her creative approach in providing solutions for creditors, debtors and lenders addressing financial challenges. Ms. Toby has been involved in numerous significant bankruptcy cases throughout the country and is a frequent speaker and media consultant in her fields.