Survival  

Debt maturity profile Companies should ensure that they have a very clear understanding of the timing of their cash needs and in particular of the maturity profile of their debt – when does debt fall due and when will refinancing be required?  

In today’s financial markets refinancing options are far fewer than they were in recent years – and those that are available are likely to take longer to bring to fruition than previously – so it is imperative that refinancing needs are identified early and refinancing work starts at a sufficiently early stage. Leaving things too late can be fatal in today’s markets.  

Debt terms  

Companies should do a very thorough review with their legal advisers of the detailed terms of their debt facilities (including loans, bonds, guarantee facilities etc). In particular there should be a careful review of all negative covenants, such as negative pledges restricting the creation of liens, restrictions on indebtedness and restrictions on disposals as well as any financial covenants that are applicable.  

The purpose of this review is to ensure that management has a very clear idea of what flexibility it has under the company’s debt facilities to take appropriate action to ensure survival over the next 12–18 months, including:

  • its flexibility/headroom to raise more debt;
  • its ability to issue secured debt or to secure particular existing debt; and
  • its flexibility to permit third party cash providers to invest in or joint venture into any of the company’s existing businesses.  

Before a company can properly play its hand, it must know exactly what cards it has to play with.  

If any technical breaches are identified, they should be cured before seeking refinancing. It is important that a company is as fully compliant as possible with its existing debt facilities when it starts negotiating the refinancing of some of those facilities.  

Continuing trading  

If a company is in danger of becoming insolvent, it (and its directors) should obtain legal advice on any limits – depending on the laws of the jurisdictions involved – on the company’s ability to continue trading. For example, in Hong Kong this will involve the laws on fraudulent trading.  

Assets for sale or joint ventures  

If a company has flexibility under its loan and other covenants to dispose of assets and/or to permit third parties to joint venture/invest into any of its businesses, it should review its business lines and investments carefully to determine:

  • which assets and/or investments may be suitable for disposal or joint ventures; and
  • which potential purchasers or joint venture partners may be interested in these assets or opportunities.

Debt buy-backs

Companies whose debt (loans or bonds) is trading at a substantial discount should consider whether it makes sense to repurchase some of their debt.  

Of course, the first question here is whether the company has spare cash that it can sensibly use to fund such purchases, because many companies will understandably want to conserve their cash resources, given the current lack of liquidity in the financial markets (see ‘Conserve cash’ below).  

However, if the company does have cash that it is able to use to fund a debt buy-back (without breaking any financial or other covenants that restrict its use of cash) or can borrow to fund a debt buy-back, then consideration can be given to buying back some of its debt to lock in the discount.  

There are a number of legal considerations to bear in mind, depending on whether the debt to be bought back consists of bonds or loans and, if bonds, whether they are listed, but the first thing to do is for the borrower to review the precise terms of the debt to be bought back carefully with its legal advisers. The devil is in the detail and whether and how debt can be bought back will depend on the terms of the relevant documentation. Other relevant factors will be the rules of any stock exchange on which the debt or the company is listed and issues such as closed periods and compliance with relevant insider dealing legislation. If the debt has been sold to US investors, it may be necessary also to comply with US tender offer requirements.  

Conserve cash  

If cash is tight, companies should implement cost control and cash control measures – for example:  

  • lengthening the credit terms they request from their suppliers;
  • taking action to cut and control costs; and
  • looking carefully at head-count control – hiring freezes and possibly redundancy programmes.  

Companies should speak to their legal advisers before implementing any head-count control measures, because good legal advice is required to minimise any severance or other payments that may need to be made to employees.  

Banking relationships  

In the current economic climate, it is vital for companies to maintain good relationships with their main/ relationship bankers.  

Two years ago, many corporates might have been more promiscuous in their relationships with banks, hedge funds and other finance providers and arrangers. These days such thinly spread borrowing relationships can be risky. Companies should, as far as possible, strengthen or re-establish their relationships with their core banks to ensure so far as possible that they have a group of core banks that they can at least talk to when refinancing or new money requirements arise.  

Negotiating with creditors  

If despite all of the above a company realises that it is now or will soon be (perhaps at its next financial covenant test date) in breach of its debt documentation, the following additional considerations apply.  

When to approach the banks Two cardinal rules of restructurings are that:

  • banks do not like surprises; and
  • banks do not like to be presented with problems, unless there is a solution attached.  

In view of this, if there is enough time before a corporate is in breach of covenants, it should always:

  • get together a full set of financial information to give to the banks – including a three-month cash flow; and
  • review carefully with its lawyers the possible solution to the problem or the request the corporate will be putting to its lenders – eg a waiver of a financial covenant as at a particular test date or a resetting or relaxation of certain financial covenants or some new money.  

It is important that the corporate and its lawyers, auditors and financial advisers prepare this information carefully, because nothing will make a group of banks lose confidence in a borrower more quickly than a situation in which the borrower’s requests change frequently or rapidly or the financial data given to the banks turns out to be unreliable.

Timing of announcement  

The timing and content of public announcements is crucial when a company is experiencing financial stress.  

If an announcement is made too early or with the wrong content it can severely hinder the company’s chances of managing its way out of its difficulties – because suppliers and other trade creditors (and credit insurers) can react adversely by restricting or cutting off credit or supplies at a time when the company may need them most.  

On the other hand, if the company is listed it will be under an obligation to disclose material price-sensitive information to the market at an early stage. It is important that companies obtain appropriate and timely legal advice on their disclosure obligations, so that they can fulfil their stock exchange obligations while attempting to avoid harmful disclosure.  

Confidentiality  

To help safeguard confidential information it is advisable that companies obtain new and appropriate confidentiality undertakings from the banks (and their advisers) to whom the company will have to pass confidential financial and other information to enable the banks to consider its request for a covenant waiver, new money or other assistance. From the company’s perspective it is not enough to rely on the existing confidentiality undertakings in the existing debt documentation.