Seeking Lender Relief During Uncertainty and Distress

The Urgency of Open Communication:

Periods of uncertainty, like an economic downturn or unforeseen disruption, raise critical questions for businesses: maintaining workforce, securing customer payments, managing cash flow, and retaining employees. Often, lender relief becomes the first and most crucial step towards immediate financial stability. Regardless of the specific need, timely, open, and honest communication with your lender is paramount for survival.

Initial Contact: Transparency and Proactive Approach:

Don't wait for a crisis to reach out. Even a simple statement like, "We're monitoring the situation closely and have implemented an action plan; we'll keep you informed," demonstrates proactive awareness and respect.

Demonstrating Preparedness:

Outline the steps you've taken to conserve cash and stabilize the business, highlighting ongoing efforts to identify further cost-savings. This shows the lender you're already taking initiative before seeking their assistance.

Avoiding Surprises:

Be direct:

• No crisis: Explain you have sufficient liquidity for now, but may need to take future action.

• Cash flow crisis: Explain your plan to conserve cash and seek the lender's guidance.

• Openness to advice: Convey your willingness to cooperate and share financial information.

• Uncertainty in projections: Acknowledge unknowns and your efforts to stay close to customers and vendors.

• Business fundamentals: Express confidence in your business's long-term strength.

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Consider future relief needs: Even if immediate relief isn't necessary, mention the possibility of future requests depending on economic conditions.

Leveraging the FDIC's Recommendation: Remind the lender of the FDIC's encouragement for working with pandemic-affected borrowers.

Utilizing Existing Lines of Credit: Consider drawing on existing credit lines before the lender restricts availability.

Senior Management Involvement:

Include senior management and equity stakeholders in initial meetings to demonstrate respect and seriousness. A seasoned lender once commented on noticing appropriate attire and representation – professionalism matters.

The Role of Your Professionals:

Choose legal and financial advisors with expertise in restructurings and distressed situations. Their role is to:

• Anticipate lender questions.

• Demonstrate control over the situation and cost-reduction efforts.

• Ensure all steps are taken to preserve collateral value.

• Prepare thorough and well-based projections with conservative, likely, and optimistic scenarios.

• Include detailed sub-schedules explaining key metrics.

• Project outstanding indebtedness under various scenarios, with and without relief.

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Consider a Liquidation Analysis:

Internally, prepare a liquidation analysis for negotiation strategy:

• Assess the lender's collateral value with liquidation costs and senior secured indebtedness.

• Consider the lender's potential responsibility and challenges of liquidation.

• Estimate sale values, costs, and timeframe.

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Sequential Negotiations:

Lender negotiations are iterative. Avoid pushing for too much too quickly, but also don't let delays worsen the situation.

First Contact:

• Inform the lender of the problem and potential need for relief.

• Assure them of ongoing communication and information sharing.

• Introduce your representatives.

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Second Contact:

• Demonstrate well-thought-out financial projections and understanding of lender concerns.

• Highlight cost-cutting measures and concessions from other stakeholders.

• Emphasize the critical need for relief and ability to return to a satisfactory repayment plan.

• Explain how proposed relief benefits the lender.

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Further Contacts:

• Prioritize essential requests, compromise options, and identify throwaways.

• Develop a strategy for future potential relief without additional negotiations.

• Avoid getting "ratcheted" by offering concessions in exchange for longer relief periods.

• Consider offering asset sale proceeds or excess cash flow in exchange for longer relief.

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The Threat of Bankruptcy:

For uncooperative creditors, Chapter 11 bankruptcy is an option. Understanding its implications can encourage a consensual workout:

• Bankruptcy judges prioritize job preservation and value recovery for all creditors.

• Uncooperative lenders may face an unfriendly court.

• Chapter 11 is expensive and can significantly decrease enterprise value.

• Customers and vendors may react negatively, worsening cash flow issues.

• Uncertainty can limit buyers in "363" sales.

• Expedited relief may be difficult to obtain.

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Conclusion:

Open communication, proactive measures, and qualified advisors are crucial for navigating uncertainty and working with lenders. Remember, cooperation ultimately benefits both sides by preserving going-concern value and allowing the business to recover.