March 24, 2020
In this period of economic uncertainty and rapidly changing rules and regulations, we have put together some practical advice for businesses to consider as they grapple with the impact of COVID-19 on operations.
Continued Business Operations
Many states have enacted requirements for non-essential businesses or businesses not classified as life-saving or part of core infrastructure sectors to shut down. Do these orders require your business to shut-down or slow-down, as appropriate, or can your business fit within any particular express or customized exemption?
Is business interruption or other insurance available to cover all or some portion of losses attributable directly or indirectly to COVID-19 issues?
Proactive Impact Mitigation
The following practical proactive steps are worthy of consideration to help mitigate the impact of a very real economic slowdown:
- Financing Relief – Proactively reach out to lenders and investors to request an extension of upcoming principal, interest and other payments for a reasonable but meaningful period (90 days appears to be a good start), including relief and forbearance with respect to inevitable financial covenant breaches (e.g. EBITDA-related or driven financial covenants will be particularly implicated). Be prepared, or at least don’t be surprised, if the lender requires a quid pro quos in exchange for relief.
- Counterparty Discussions – Proactively reach out to counterparties under material commercial contracts to engage in similar discussions regardless of potential implication of force majeure provisions, and obtain a better understanding of escape clauses (such as force majeure) in those contracts.
Liquidity and credit are, and will continue to be, key components to each business. Based on yesterday’s announcement from the Fed, it appears that the federal government is willing to inject as much liquidity as is required to keep the economy running. That said, we recommend giving proactive consideration to the following:
- Working Capital Availability – Use existing working capital line of credit availability subject to the terms and conditions of the loan documents.
- Governmental Liquidity – Consider accessing low-interest or forgivable loans made available by the federal or state governments to address payroll and other obligations. We are preparing a separate summary of these programs including the CARES Act and amounts available under the economic injury disaster loan program.
- Additional Liquidity – We expect non-bank providers of debt to step into the breach, at higher returns, to provide liquidity if needed. In addition, private equity fund sponsors may want to consider injecting additional capital, perhaps in exchange for higher interest or a form of additional equity (warrants or convertibility feature in its investment), to provide portfolio companies with some short- and long-term liquidity relief.
In the event that your business is still facing an existential crises after the foregoing, we recommend having early discussions with an experienced investment banker or bankruptcy attorney who can assist companies with financially stressed situations. In our experience, proactively dealing with problems leads to better outcomes than waiting until creditors force the business into liquidation.
Our combined group of Stevens & Lee lawyers, Griffin Financial Group investment bankers and SES ESOP Strategies professionals in our multidisciplinary Platform is ready to help you with any of the foregoing steps. We are working together to stay current on new developments and to assist clients with issues affecting them during this unprecedented global health challenge.