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Managing External Liquidity


In virtual boardrooms across the UK, company directors, shareholders and investors have seen polished business plans and revenue forecasts upended, as the all-consuming scope and scale of Covid-19 throws conventional playbooks out of the window. To adapt to this new radical uncertainty, level-headed decision-making and communication with stakeholders – investors, employees, customers, suppliers, landlords, the taxman, the regulator and lenders – is paramount to navigate the fog. 

In this continuing series of articles, we outline the most frequently asked questions by our clients and offer our insights. In this article, we discuss how companies should approach external liquidity. 

Raising external liquidity through equity, debt or asset disposals is likely to be expensive in these challenging times. Selling unneeded assets, such as machinery or owned buildings will take time with valuations likely subject to price reductions and reduced market liquidity. Fresh investor equity will be available for viable businesses, but company directors will face tough negotiations on equity valuations from able opportunistic investors who will seek discounts due to market uncertainty.

Many companies will be considering refinancing or raising new debt to improve short term liquidity. However, this option, too, requires a balancing act. On the one hand, it would be prudent to not engage overburdened banks in refinancing or new money discussions if not immediately required as current uncertainty will likely increase costs of debt and it is challenging to present credible business forecasts. Those with strong lender relationships with long track records may be able to negotiate extensions to existing facilities, capital repayment holidays or even standstill agreements, in some cases with arrangement fees structured for payment at loan expiry to support immediate liquidity. If companies do have near-term refinancing requirements or need to negotiate debt headroom extensions, the complexity and challenge should not be underestimated.  Whilst various types of government backed business loans have been made available via banks, successful applications are low, and if your existing bank declines an application, introducing another lender to the financing structure can add complexity and cost.   

While the Bank of England (BoE) and regulators have taken steps to loosen capital requirements allowing banks to hold lower capital reserves against lending, it is difficult to assess today to what expect the impact of Covid-19 market disruption will do in terms of tightened financing liquidity in six to 12 months. Banks are in a much healthier financial position now than they were going into the GFC, however, even a moderate – and manageable – liquidity squeeze could result in rising debt costs, lower offered LTVs and tighter covenants post-lockdown, exacerbated by a potential recessionary period which will depress asset valuations and probably financial performance across the board. Management teams, including those backed by PE investors, need to balance these competing priorities and make decisions with highly imperfect information.  

There are other alternatives for external financing. Opportunistic investors are also available to provide bridge financing, which will require collateral as security and invariably be more expensive than clearing bank finance. However, credit approval can be secured quickly, which for some companies with acute near-term cash flow requirements may be a necessary medicine to swallow. Crucially, assessing the accurate requirement size and duration is crucial to controlling debt costs.

These are all complex considerations and events are fast-moving and strategic decisions should be made with appropriate professional advisers. If you would like professional advice to identify the options open to your company to raise external liquidity, please do get in touch. 

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