Mid-Market Management Group on Coronavirus Loan Economics: What’s the Best Way to Navigate Your Loan Relationship?
Economic cycles come and go. In the past, the US economy, much like the Energizer Bunny, just kept on going. However, this pandemic “black swan” event seems to be very different. The ongoing health issue has stopped the US – and indeed the global – economy cold in its tracks.
The Federal Reserve has pulled out almost every play from the 2008-2009 recovery experience, keeping the capital markets open and operating with liquidity. Yet, the same cannot be said for Main Street USA. Almost half of US employment comes from small business operations, areas that have been the hardest hit. Now, the question is: What will happen after the funding from the PPP and EIDL programs and checks from the Treasury run out? Our current deep and broad-based economic problems require long term solutions. Temporary stimulus for the millions of unemployed and devastated businesses will not be enough to get to full recovery. We have a long-term relationship challenge in front of us which will require hard work and thoughtful strategies to restart our economy, hopefully saving as many businesses and jobs as possible.
Lending money is a key component in keeping our economy functioning. Investment activity will be sorely tested over the next few years as lenders deal with a tidal wave of defaults and deferrals; never mind lending new money for growth activities. Lenders will need to determine if borrowers are viable…or “economic zombies.” Who to support? Who should follow a path of liquidation or bankruptcy? Similar to the temporary stimulus described above, it is clear a “pretend, amend and extend” strategy will not be fruitful long-term, as thoughtful re-start or turnaround plans need to be implemented, or in the alternative, exit strategies put in play. Below are a few of the key points you should consider when analyzing lender/borrower situations to develop and implement solutions to loan stress.
Is the business sustainable long-term, and does management have a good operating plan? I think we can all agree that a basic component of a satisfying borrower and lender relationship is the need to make money. How do you get an unbiased evaluation of this key factor to build a successful loan optimization plan? And don’t forget, while you work on this evaluation, other debt holders and vendors will ask to get paid too, as they work on their own cash flow needs. These are only a few of the many things you need to be thinking about as you craft your plan. Remediation of debt stress can make you feel like a hamster on a wheel, and is often overwhelming given the many constituencies that need to be dealt with.
What should your loan-optimization checklist include? The list of things to do can seem almost endless, and needs to be addressed in real-time fashion, beginning with:
- Preparation of the thirteen week cash flow plan
- Documentation review
- Collateral and business valuations
- Industry strengths and weakness
- Other potentially complex matters such as swaps and second liens, etc.
After performing your initial evaluation what are your solutions? This partial list of potential remedies might even be longer than the list of things you need to do and be aware of:
- A waiver, an amendment or forbearance in a non-judicial situation?
- Can you support lending more money?
- How do you limit adding any additional liability to the program?
- Is this a bankruptcy or receivership in waiting?
- Maybe a secured party sale or even an A/B note structure?
- How about an asset sale or merger?
Despite a difficult economic cycle, there are actions that can be taken to mitigate its impact. Mid-Market Management Group (MMMG) would be happy to sit down with you (virtually or six feet apart) to discuss our “Ten Key Considerations in Developing Strategies for Stressed Loans” road-map to get to where a lender needs to be. We also provide educational seminars for loan management under different scenarios, which you are welcome to join.