The COVID-19 pandemic certainly changed the financial world we live in. Unemployment has reached record levels and the stock market has dramatically retrenched. Generally lending and availability of cash flow has tightened up. In an article earlier this month, a reference was made that in less than six months, the pendulum has swung and that “it has become a lenders market.” However, I am not convinced that is totally true. Some things have dramatically changed but others remain very much the same.
Staying the Same
No matter the environment, there are always segments looking to take advantage. Few people were surprised to read that JCPenney filed for bankruptcy. The company is going to close hundreds of stores and layoff hundreds, if not thousands, of employees. Yet it will pay executives significant “stay” bonuses each well in excess of a $1 million. For what purpose? There are hundreds of Executives CFOs who could step in and without missing a beat that would do it for less than $1 million.
The Payment Protection Program (PPP)’sThe Frequently Asked Questions addresses the concern for entities who have amongst other things have applied for and received funds, but may have not met the program standards and the “spirit of the program” yet somehow “qualified” for program funds. Once the entity has taken the funds, they could have voluntarily returned the money or potentially suffer consequences that would make the penalties suffered in the college admission scandal seem like a slap on the wrist. For further reference, see Shake Shack, Ruth Chris’s Restaurant or Harvard University.
Change, Perspective and Opportunity
My sense is that most people and companies have learned more humility in the last 10 weeks than they have had in the last 10 years. And with monumental disruptions being the rule rather than the exception, does that make more of a lenders’ market? I am not so sure.
Collateral values seem to have declined at extraordinarily quick rates. In some cases, appraised values are 50% of what they were two years ago. While bankruptcy filings may have ticked up, the asset realization or the exit end have stalled because there are fewer auctions and/or dispositions. In addition, certain jurisdictions have authorized and approved rent deferrals. Payment deferrals in the short term are also the norm, not the exception, and while PPP loans can be used in some cases to shore up certain collateral positions, they cannot be used to amortize, pay or accelerate principal payments.
In the past, exiting loans was relatively easy. A couple of calls to the right interested party and the lender could exit at or close to par. That is not the case today.
In the last month, I have received more calls from distressed or hedge funds looking to deploy capital, but the price they are looking to pay is dramatically reduced. So what are lenders looking for in today’s market? Knowing the pressures and the changes that we are going through, finesse has now become as important as ever.
Opportunities for the Opportunistic
The cliché that one’s best opportunity may come from its existing customer base certainly rings true. Obtaining an accurate read on a new borrower in uncertain times is really tough, especially when site visits are difficult to arrange. Consider requesting an increase from your current lender.
One of my clients considered an Economic Injury Disaster Loan (EIDL). This loan comes with an excellent rate but significant restrictions and reporting requirements. After speaking with his current lender, and because of the current relationship, the loan provided additional financing much more quickly and at a similar rate with significantly fewer restrictions. Everybody is looking for new opportunities, especially when the world is just beginning to open up. The path of least resistance is one that should be considered.
The PPP opened up new relationship opportunities both for lenders and middle market companies. Excellent vision and attention to detail is never underrated. Many regional lenders were very nimble and saw this as a growth opportunity for the right audience. They dedicated additional resources to determine those prospective borrowers that met their criteria. They viewed this as an initial opportunity to provide subsidized liquidity, which would open the door to additional growth needs. Excellent customer service is noticed today more than ever.
Communication early and often is paramount. Being able to articulate the impact of the Covid-19 pandemic is critical. Give your best insights and perspective for the short term and long term so all your stakeholders are prepared. In some cases, like with food processors and manufacturers servicing grocery stores, business has increased dramatically. Whether for better or worse, outline the changes and expectations.
Whether you are the lender looking to increase the facility and make your bonus numbers for the quarter or the borrower consider shoring up the company’s capital structure in a time of uncertainty, be confident and comprehensive. Know what to present when making an ask. How much is needed? How long are the incremental funds needed? When will it be paid back? Is there additional collateral to be pledged?
In times like these leverage and humility are funny things. Here are two situations with totally opposite approaches, trying to ultimately achieve the same outcome. In one the client is in retail and despite having the principal be consistently amortized, the lender put forth a forbearance agreement with a disproportionate share of aggressive conditions for the amount of the loan outstanding.Rights and remedies are somewhat in place, but for the foreseeable future, there is nowhere to go. Finesse instead of leverage would serve a better purpose for everybody. Inhe second situation, rights and remedies are currently in place. But finesse, communications and projections are being utilized to generate accelerated additional pay downs to better position the company and the lender with all the constituencies’ stakeholders.
Whether you’re the borrower or the lender, traditional commercial bank or non-traditional lender, publicly backed or privately financed, disruption leads to uncertainty, which leads to change which leads to disappointment for some, conservatism for others and opportunity for others. Regardless of your leverage, your position or your platform, empathy and compassion are needed to see all of us through to the other side.
Robert D. Katz, CTP, CPA, MBA is a managing director of EisnerAmper’s Financial Advisory Services group and an expert in lender relations and increasing cash flow. He is one of the founders of TMA’s most successful conferences, The Distressed Investing Conference. Katz is a Member of CFA’s Education Foundation. He is an adjunct professor in strategic management and corporate finance at Temple University. He can be reached at Robert.Katz@eisneramper.com or (215) 881-8828.