In our recent update (see here), we discussed a number of practical matters for borrowers to consider in connection with the Alert Level 4 lockdown and their funding arrangements. As New Zealand transitions to Alert Level 2 and business activity increases, borrowers should be turning their minds to the next phase of managing their funding arrangements.
Bank and non-bank lenders have signalled their readiness to support businesses in New Zealand throughout their return to the ‘new normal’. Be proactive in approaching lenders, armed with the necessary information, to assist lenders in helping your business move forward. Below, we provide some practical considerations for borrowers who are thinking ‘where to next’ with their debt.
Temporary waivers, payment holidays and reliefs
For many borrowers, the temporary cessation of, or downturn in, business as a result of the Government mandated lockdown will have required waivers and/or other reliefs from lenders to avoid defaulting under loan facilities. Any COVID-19 related waivers and/or other reliefs obtained will be temporary, and some may have conditions attached to them. It is important that borrowers are conscious of these timeframes and conditions, and seek further extensions from their lenders in advance, if these conditions are unlikely to be met by the required time.
Borrowers should also be assessing whether deferments of testing dates or repayment dates, or waivers in respect of ‘material adverse changes’ resulting from COVID-19 (discussed further in our previous update) or other technical breaches arising from any suspension of business or change in the way the business was operated due to COVID-19 and/or going forward are required.
We recommend that any informal agreements reached by the borrowers with their lenders should be formalised in writing.
Refinancing and new borrowing
We are acutely aware that some borrowers may be looking beyond temporary relief, to refinance or restructure their existing facilities or to seek further funding for new business opportunities. Some matters for borrowers to consider include:
- Whether a lender is likely to want more security or greater oversight over your business, for example:
- If you have borrowed against cashflow from your business, good debtor management and collection will be important. Lenders will expect their borrowers to be monitoring recoveries closely, and are likely to want tighter controls around defaults.
- If you have borrowed against some (but not all) business assets, lenders may be looking to take further security.
- For closely-held companies, some lenders may also be looking to directors and shareholders to support lending with personal guarantees and/or further equity injection.
- Lenders will be keen to understand what measures and initiatives their borrowers have taken and/or will take to minimise the negative impact of Covid-19, including cost cutting steps to assist with maximising cash inflows.
- We expect that lenders will approach a highly leveraged funding with caution and may require additional measures to be taken, for example sell-down of any non-performing assets to bring the current debt level down.
- For property investors and developers, the availability of loan facilities will be tied to the value of the underlying secured property, under a maximum loan-to-value ratio, or “LVR”. While lenders are unlikely to request updated valuations outside of scheduled review dates, borrowers should nonetheless consider whether any revised valuations (in light of changing market conditions) are likely to impact negatively on LVR.
- Funding for property developments will likely contain prescriptive requirements around project milestones and timelines. Extensions of time for any delays to project completion should be discussed with your lender. Funding which depends on achieving minimum qualifying pre-sale level will also likely be impacted from the flow-on effects on the New Zealand economy from COVID-19 and on buyer’s confidence.
Borrowers are encouraged to seek legal advice in relation to any redocumentation of their existing loans, or entry into new loan facilities. Even where loans are to be documented on ‘standard form’ documents, a detailed review (and in some cases, amendments) may be required to ensure the documents are more ‘COVID-19-proof’.
Financial covenants and financial information
Likewise, borrowers should be considering how business is tracking against projections, and whether they need to approach their lenders to provide them with an updated snapshot of the business. Many facilities will require borrowers to report to lenders on material departures from previously approved budgets and forecasts.
It also remains important that any financial covenants contained in facilities are closely monitored, as changes to businesses and external factors may impact on these.
Be prepared with information
When approaching a lender (either existing or prospective) be armed with well presented financial information. If you are seeking further funding, lenders will want to see evidence that the business will be able to repay the funds as and when required. Lenders will expect to see projections that are based on a sound set of assumptions around business performance, market conditions and serviceability of loans. We encourage borrowers to reach out to lenders, and ask what information is required to consider their particular request.
Be conscious that lenders will be dealing with significant volumes of requests at this time. Being prepared with the information needed for a lender to consider your application will assist in processing your application in a timely manner.
Borrowers should also consider talking to a financial adviser to ensure that any forecasts and financial models are realistic, and that the business is putting its best case forward.
New tools for borrowers
In response to COVID-19, a number of new tools have been (or are about to be) made available to assist borrowers that require relief in relation to existing funding, or assistance with further funding. These include:
- The ‘debt hibernation scheme’ (Scheme) proposed under the COVID-19 Response (Further Management Measures) Legislation Bill. Once enacted, the Scheme will allow otherwise solvent businesses to place debts into hibernation for up to seven months (on application, and with the agreement of a majority of its creditors). If agreed to by a majority of creditors, creditors will be unable to take enforcement action during the agreed time. Most loan facilities will have restrictions on borrowers taking steps towards accessing the Scheme, so it is important that borrowers consult their agreements and consider the implications before making an application.
- The ‘business finance guarantee scheme’ loans (BFGS Loans). In conjunction with the Government, major banks are making BFGS Loans available to small-to-medium sized businesses operating in certain sectors. BFGS Loans are subject to certain eligibility criteria being met, and are available up to a limit of $500,000. For existing borrowers that meet the criteria, BFGS Loans can also be used to increase existing facility limits. BFGS Loans are provided on commercial terms, and are subject to normal bank approval.
- The Inland Revenue Department (IRD) is administering a small business cashflow loan scheme (SBCS), which is available to businesses that are eligible for the wage subsidy and have 50 or fewer full-time equivalent employees (including sole traders). SBCS loans are $10,000 plus $1,800 per full time employee (up to a maximum of $100,000). The loans are subject to interest at 3% per annum, with interest being written off if the loan is repaid in full within12 months. Repayments are voluntary for the first 24 months, but are compulsory after that. Applications are open until 12 June 2020, and can be made directly with the IRD.
Although not a product of COVID-19, the Farm Debt Mediation Act 2019 will soon come into force, and offers further protection to farm businesses in relation to enforcement by lenders of securities. For further updates on this, please see our earlier articles:
We’re here to help
Our team is here to assist with all funding related matters and queries, whether that be assessing and addressing issues arising out of existing facilities, guiding you through a refinancing or restructuring process, or obtaining new funding. Please contact one of the team for a no obligations chat.