Today, most companies are funded through debt and equity instruments. To the extent that a company is debt-financed, it is likely subject to requirements by its lending institution in the form of affirmative/negative covenants, financial performance, monetary loan thresholds and maturity dates. In the current climate, there are dramatic economic changes that can make adherence to such required stipulations challenging.
When challenges arise, companies often experience difficulties communicating with lending institutions due to fear that the bank will call the loan, cease additional lending, exercise its right to seize assets or initiate legal action that could force the company into bankruptcy. When faced with this situation, the worst decision an organization can make is to do nothing. If a company is aware of an impending violation of loan agreement conditions, it is important to seek the help of an experienced and qualified financial adviser to increase credibility with the lending institution, determine possible outcomes, and initiate negotiations to amend covenants, refinance debt or implement a forbearance agreement.
Challenges and Opportunities
In a challenging economic environment, there are limited opportunities to solve financing problems and preserve a company’s relationship with lenders.
Issues should be addressed proactively and properly handled, in conjunction with management’s efforts, by experienced professionals with expertise in this area. Financial advisers are able to prepare sophisticated financial models that project the company’s cash flow, financial performance and general liquidity. The ability to present these materials, along with a financial adviser’s credentials, will assist in negotiations with lenders, creditors and vendors, and provide the management team with credibility and confidence when dealing with lending institutions.
Cash flow projections and financial modeling – The first step in negotiating with a lending institution is to provide updated projections of cash forecast needs, financial performance and future liquidity ratios. As every business is unique and financial projections must take the form of specific business needs, management needs varying scenario analyses that illustrate the impact on financial statements and cash flow requirements of a dynamic situation.
Leadership and financial planning – It is imperative that management minimize the impact to operational and support staff during the negotiation and restructuring period. It may be beneficial to the organization as a whole to formalize the internal responsibilities by appointing a chief restructuring officer (CRO). The CRO’s primary responsibility is to ensure the process moves forward in a productive and efficient manner. We find that having a CRO in place is also comforting to the employee base, as they can see proactive steps being taken to relieve current stress on the company. In addition, from the lender’s perspective, the introduction of the CRO provides further credibility to an organization and is helpful with resource deployment, speed of execution and the level of information available.
Lender negotiations and services – The most effective approach when communicating and negotiating with lending institutions is to think as they do. Lenders are interested in obtaining a clear working knowledge of the company’s operations, financial position and cash flow needs. The company should present a strong business case to its lenders that focuses on cash flow forecasts, return of capital and strength of assets.
How We Help Companies Succeed
Our professionals are CPAs, CIRAs, MBAs and financing specialists who have extensive experience in working with financial institutions. We have successfully prevented the liquidation of companies, renegotiated loan covenants, and secured additional financing for companies facing financial difficulties. We have assisted companies in a wide array of industries and have tackled their disputes with lending institutions by delivering an outcome based on compromise, sustainability, and limited impact to operations and the company’s employee base.
As financial advisers, we provide the management team with credibility and confidence when dealing with lending institutions. Our team of professionals creates fully integrated financial models that support a company’s needs throughout the negotiation process.
We work with management to prepare operating and cash flow assumptions that are embedded in the financial model and can be articulated clearly and supported to the financial institution. We also present a narrative to accompany the fully integrated financial model and provide scenario forecasting and solution-based
alternatives addressing issues facing the company and its lenders.
Our client was in default of secured financing debt covenants and was at risk of losing the right to manage the business due to negative earnings, depleted liquidity and an adversarial relationship with its secured lender.
The secured lender was motivated to take additional steps against our client due to inconsistencies in reported financial statements, an inability to predict future cash flows, a lack
of internal controls and a perception that the management team was deceptive. Shortly after the engagement commenced, Protiviti was appointed as chief restructuring officer and interim chief financial officer. Subsequently, we were recognized by the secured lender and management team as a catalyst for the improvement of fiscal responsibility, financial reporting, cash flow management and forecasting. In addition, we:
- Successfully negotiated an amended agreement and a waiver of all instances of default.
- Created a financial model that our client relies on to prepare projections, model operating scenarios, and meet reporting and financing requirements.
- Helped improve the company’s profitability, which led to a significant increase in the company’s value.