Juanita Schwartzkopf
Senior Managing Director
Focus Management Group

Now that Q2/20 is closed and the initial impacts of COVID-19 on financial performance have been recorded, there are opportunities for lenders. New business development lenders have been sitting on the sidelines and are tired of their basements and home offices. These lenders are used to booking new deals and they want to do that now. Their bosses want them to start closing new business as well. 

Most companies have completed their first half year financial statements and reforecasted the remainder of 2020 while using the COVID-19 pandemic as an opportunity to reinvent themselves from a product, product mix, supplier and profitability perspective. In addition, many have improved working capital management out of necessity.

These dynamics create an environment in which businesses are able to switch lenders. Businesses are in business and lenders are lending money. Take advantage of the opportunity.

Why Are There Refinance Opportunities Now?

Companies have been busy during Q2/20 and Q3/20 planning for recovery and managing working capital and cash as business returns to its new normal. There are many examples of opportunities and successes.

The impact of COVID-19 has forced businesses to reduce operating costs and use working capital management practices they previously would not employ. Reducing expense run rates and improving the operating cycle and cash management has provided needed improvement in some borrowers’ financial performance. Deal fatigue means incumbent lenders are not interested in staying involved, but the challenges of COVID-19 have helped drive home the need for changes to improve the future performance of borrowers.

Some lenders have evaluated their portfolios by industry sector and are reducing or eliminating lending to specific industries. As a result of these decisions, there are performing companies with adequate collateral bases that are looking for new lenders, even in troubled industries.

This is a perfect opportunity for special assets managers to review their portfolio and identify borrowers that would like to exit their bank. It can help to take a more aggressive approach when asking borrowers to source new lending,

Who Are Good Candidates?

Borrowers with ABL collateral, and especially if reserves have been built up during the period in special assets, are great candidates for refinance. ABL lenders are willing to overlook COVID-19 impacts for solid collateral and satisfactory performance.

Borrowers in tough industries that are performing at a reasonable level  — and can show they made changes to improve performance during the pandemic — have a great story to tell about responding to challenges in difficult times.

Borrowers who have continued adequate performance levels even under COVID-19 are interesting targets for new lenders as well. Some industries and some companies within industries experienced less impact and are posting consistently adequate performance levels.

Let’s turn to a few real-world examples of borrowers that are ready to move on to new lenders and for whom the refinance approach would be successful.

A borrower in the food processing sector was anticipating over-advances under an ABL facility as a result of COVID-19’s impact on the way consumers purchase food, which in turn affected demand for different products. Vendors were pushing for payment and customers were slowing down payment. The borrower took advice on working capital management and did not become the lender to its customers and its supplier. The borrower also took advantage of government programs and worked through some less desirable inventory. This borrower is a great example of a company in an impacted industry that took advantage of working capital management best practices and emerged stronger. This borrower is a candidate for refinance if the incumbent lender suggests such a strategy. The collateral is solid, the margins are improved and the working capital management has been enhanced.

In a second example, consider a borrower in the consumer products sector that immediately reduced its overhead costs by cutting some staff, utilizing senior management pay reductions and renegotiating rents. The borrower determined a way to maximize new products and develop its e-commerce delivery methods. Using these cost management and product delivery techniques allowed the borrower to reduce costs, offer new products and implement new “subscribe and save” type service options. The borrower is still recovering but is well positioned to return to business with the potential for even better performance. This borrower is also a candidate for refinance. Performance has not yet recovered, but the borrower has developed plans, implemented cost reductions and new strategies, and proven its commitment to returning to a new normal.

In a third example, consider a borrower in the agricultural sector that made use of various Department of Agriculture programs and took the time to improve financial reporting capabilities. As a result of loan paydowns and a better ability to report financial results and forecasts, this borrower is positioned to refinance even in an industry that is being hit with bad headlines on a regular basis. This borrower is a candidate for refinance because the incumbent lender asked for some minimal reductions in borrowing and required improved financial reporting. Those two requests make this borrower’s refinance possible.

What Can a Lender Do?

This is a time when speed is important. As a lender, you need to identify the borrowers that you want to refinance and work with them to accomplish that goal. There are going to be many deals that close between now and the end of 2020. You want the borrowers you select to be part of that wave. One lender’s problem loan is another lender’s new business development opportunity.

First, from a financial reporting perspective, get out in front of the financial reporting for June 30, 2020. Make sure it has been provided. Then suggest any borrower that has not completed a 2020 reforecast complete that reforecast as quickly as possible.

Next complete your analysis of the financial performance of the borrower:

  • Identify borrowers who have used Paycheck Protection Program loans, tax deferrals and other government programs to report stable or better than expected performance.
  • Identify borrowers that have made changes to their business model in response to COVID-19 and have a good story to tell a new lender.
  • Identify borrowers that have reserves on their lines of credit that a new, aggressive lender could use to enhance availability.
  • Identify borrowers that have been difficult to deal with from a field exam or appraisal perspective.

Now incumbent lenders have lists of borrowers they would like to have refinanced and these lenders have positioned their borrowers to: 1) have current financial information, 2) have answers to questions about financial performance and 3) have an updated forecast.

This financial reporting package coupled with decent collateral creates an environment that is interesting to a replacement lender.

Borrowers with some “meat on the bones” in terms of cash flow, working capital management, collateral and performance improvement or stabilization are the borrowers that new lenders are looking for today. There is an ability for some lenders to stretch on structure or increase rates to offset risk in an effort to bring in new business. 

New business development officers need incumbent lenders’ borrowers in order to meet goals for new loans. Although there is still uncertainty in the economy, new loans are being made and borrowers are moving their lending relationships. This can be the perfect time to complete a refinance.