William Henrich


Getzler Henrich & Associates

It hardly needs to be said, but we’re living today in a tumultuous world. We naively thought global geopolitical activity and the U.S. presidential election would shape our economy. Little did we expect those factors would be overshadowed by a global pandemic.

Welcome to the world of COVID-19, which has created an unprecedented impact on both our economic health and personal well-being. We’re experiencing a dramatic rise in coronavirus cases and related deaths, yet the virus’ effect in the U.S. remains in its early stages. Worldwide quarantining/sheltering-in-place is wreaking havoc on the global supply chain, causing disruption and financial challenges for suppliers and customers alike. The hardest hit industries, such as retail/restaurant, travel, hospitality and entertainment, are for the most part shut down. Despite monetary and fiscal policy measures being implemented for economic stimulus, a considerable slowdown is anticipated for the U.S. economy.

Lender Response

How are companies and lenders dealing with the crisis now, and what can be expected next? While the duration of COVID-19’s impact is uncertain, as is the pace of the climb back to normalcy in its aftermath, certain actions must be taken now. Companies are implementing actions to deal with the new reality of dramatically reduced top line revenue; lenders are inundated with requests to draw down credit lines, manage government subsidy/loan programs, extend themselves, increase exposure and aid their borrowers. There are no simple answers, but decisive responses are required.

Lenders are examining their portfolios to assess potential credit risk, focusing on COVID-19’s impact on industry, customer base, geographic location, sourcing, collateral value and borrowers’ ability to meet financial covenants, debt service and repayment obligations. Despite increased margin pressure from interest rate reductions and the run on credit lines, lenders want to help their borrowers, ignoring Material Adverse Effect clauses, anti-hoarding provisions and offset rights. The struggle is determining how to prioritize time and who to help given the high volume of requests for relief from existing credit limits, reserves/blocks and advance rates.

Cash(flow) is King

To get their lender’s attention, a company must evidence they’ve taken steps to help themselves before seeking or expecting their lender to help. The old axiom “Cash is King” has never rung truer. Companies must utilize every tool within their grasp to manage cash and align their cost structure with their new revenue reality. The most effective measure of a company’s liquidity is a 13 week rolling cash flow to determine (a) will you run out of cash and when, (b) how much is required and (c) for how long.

In preparing the 13 week rolling cash flow, management needs to forecast their cash receipts based on a granular analytic examination of their customer base and product/service offering with conservative assumptions, improve their working capital management, consider availability of unencumbered collateral for additional borrowings and take advantage of COVID-19 relief programs. Cost structures must be reduced commensurate with the decline in sales and margin dollars and management should err on the side of aggressive cost reduction. Once the cash is spent, they can’t get it back. The objective is to maintain the company as a going concern for the benefit of those continuing to be employed and those who want to be rehired.

Cost reduction and deferment opportunities extend beyond merely reductions in force, furloughs and salary reductions, and the implementation of these measures should be reviewed with legal counsel. Communicating often and early with employees, vendors, stakeholders and customers is critical for survival; leadership and decisive action are required.


Vendors and landlords provide opportunity for cash support. Companies need to turn off the faucet of unnecessary purchases, evaluate inventory return rights (yet hold inventory that could become in short supply when business resumes), negotiate moratoriums and extended payment terms on existing payables and for current purchases. While it’s necessary to explain to vendors and customers the company’s ability to weather the crisis and remain financially viable to ensure continuance of supply, the financial health of vendors and customers also needs to be assessed. Replacement sources of supply need to be identified if a current source’s financial stability is questionable. Companies should negotiate relief from short-term rent obligations and terms for repayment. It may be a favorable time to negotiate lease mitigation payments for undesired locations as well.

The bottom line is companies are required to take and demonstrate for their lenders a proactive approach to preserving liquidity, enterprise value and viability. They must formulate a comprehensive plan, pursuing all avenues for cash inflows and cost reductions, and exhibit a willingness to implement it. Multiple scenarios and contingency plans should be prepared for varied economic outcomes. Performance against the plan needs to be measured and reported so real-time decisions can be made to pivot to a contingency plan. Plans for the ramp up in business when the crisis diminishes, and introspective performance improvement reviews, also should be progressed while the time permits.

A borrower must deliver a clear articulate plan with detail to even obtain the attention of its lender. Lenders are desperately attempting to balance managing exposure while seeking to be supportive, and they’re not looking to create more problems than already exist. Nevertheless, borrowers must meet a minimum standard of sound management planning and action for their requests for assistance to be considered.

Material Uncertainty

The requests from borrowers facing lenders today won’t cease in the future. There are a multitude of areas within credit agreements that will require examination and adjustment. Earlier referenced was the material adverse effect clause, standard in agreements. Typical considerations are whether the clause was written with a forward-looking outlook, whether the impact experience is short-term or long-term or whether the material adverse effect substantially threatens business earnings potential. It’s hard to argue whether COVID-19 could have been reasonably expected at the time the credit agreement was signed. This is likely to be of less consequence under the circumstances than the following.

A material uncertainty is the stability of collateral value; new appraisals resulting in depressed collateral valuations could lead to reduced availability. However, such restrictions on availability could create additional strains on borrowers. Reporting requirements as well as monthly, quarterly and annual deadlines may require extensions. When calculating whether a borrower met its minimum EBITDA covenant, is a reduction in revenue properly characterized as a “loss”?

Financial covenant non-compliance will be rampant for those borrowers who were impacted by the coronavirus and the request for covenant waivers will be voluminous. Will equity cures be enforced in full or in part? To the extent credit agreements previously excluded certain borrower collateral or loan parties, will lenders exercise their negotiation leverage to be inclusive to extend their liens? Will soon-expiring credit agreements be extended for typical terms or will extensions be short-term in order to give lenders time to reassess the borrowers’ creditworthiness and ability to meet embedded requirements?

With continued diligence on following CDC guidelines, COVID-19 will pass. The stories of the coronavirus’ impact on business and people’s lives are devastating, and the stories of heroism of first responders and essential business workers are inspiring. Finding the strength and courage to make tough decisions and carry on is embedded within us; humans are resilient. Vision toward the balance between meeting corporate objectives and being benevolent is sometimes blurred. For how long will the virus’ impact linger in its wake? Much is dependent on the duration of COVID-19, the severity of the damage on business, the economy and discretionary income and the speed of return of normal consumer/industrial demand. Although the answers to these questions are unknown, we do know the spirit of the financial community and businesses to work together will prevail.

William Henrich is co-chairman of Getzler Henrich & Associates.