Last week, a Houlihan Lokey team helped a premier corporate client raise a significant amount of additional debt capital in order to be better prepared during the coming months. I suspect there will be many more such transactions during the course of this spring. These are unprecedented times, and no one can accurately predict the full extent of the impact the covid-19 crisis will ultimately have on the financial well-being of businesses.
However, one thing is clear: the prognoses of companies can change incredibly quickly. Therefore, ensuring their organisation has the liquidity it needs to weather the worst of storms is among the single most important actions company directors can take. Fortunately, management teams and the boards they report to can take several important steps today.
First, they need to quickly determine, as best they can, what the business’s needs really are and, more importantly, what they could become. A CFO or treasurer’s new ‘base case’ for estimating future financial results has to reflect two factors: that the economic impact of the measures required to slow or stop the coronavirus could deal a severe blow to their revenues; and that this adverse impact could go on for several months.
This exercise will show what the company’s need for additional liquidity might be. Many businesses have the untapped credit lines needed to fill their potential liquidity requirements. However, I am confident that at least as many do not. For those companies that do not have adequate excess liquidity to carry them through the crisis, management essentially has four key areas to look to for support:
The company’s existing lenders They are already ‘long’ on the investments and may choose to support the company, if for no reason other than to protect their existing exposure by enabling it to make it to the other side.
New lenders If existing lenders are not able or willing to increase liquidity, the company can look to new lenders. These can either refinance the existing lenders entirely – which is, of course, harder the more challenging the crisis becomes – or they can come into the structure on terms that work within the confines of the existing lenders’ contracts. This will be easier for larger companies which operate with credit agreements that usually allow for sizeable baskets, thereby allowing such investments to be large and worthwhile enough for new lenders to allocate their resources.
Assuming this checks out, there is a huge stockpile of private debt that has been raised and is committed to being deployed in European direct lending. In engaging with these lenders, the key is to balance the security of the company with the cost of capital. Companies need reliable, dependable finance – it is all about certainty, not about every basis point in margin or fee.
Government relief programmes It is imperative that companies seek to fully understand governmental programmes designed to provide the corporate sector with relief from the covid-19 outbreak. Much of such support is likely to be provided via commercial banks. However, at the time of writing, the details are still murky and greater clarity over how to access these support systems is needed. This, unfortunately, will be an evolving area and may or may not come soon enough for some companies.
Existing equity shareholders I suspect that in many cases this will prove a challenging path, given that public markets are highly volatile and private equity owners are themselves trying to figure out what all of this means for them. Plus, equity is relatively expensive. However, no option can or should be dismissed, and we do anticipate a sharp uptick in the number of emergency rights issuances and private equity infusions.
Securing additional liquidity has much more upside than downside. If it turns out that a company doesn’t end up needing all the additional capital it raised, it should simply be seen as one of the best insurance policies ever taken out.
Patrick Schoennagel is a managing director in the Capital Markets Group at Houlihan Lokey, an independent investment bank