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:
- 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?
- 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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