You probably don’t need us to tell you that your business is
operating in unprecedented times. Not only has the economy stalled
and then slid into recession, liquidity in the financial markets has
virtually dried up. Not only are banks not lending they are seeking
to protect themselves by re-evaluating their risk. Where your
existing facilities fall to be renewed (and in some cases even when
they do not) you can expect your bank to adopt a much tougher
posture.
When liquidity in the financial markets dries up, banks look
critically at each lending relationship in terms of risk and reward.
Unfortunately it is a legacy of the “boom” times where banks and
other lenders were engaged in cut throat competition to win
business, that many deals when looked at in the current economic
circumstances represent (in the banks eyes at least) an
unjustifiable risk for an insubstantial reward. Expect, then, that
they will look to reflect their risk with increased pricing
structures.
Be wary also that it may not be sufficient simply that you have
operated within the limits of the facility. In increasingly
difficult conditions maintaining sufficient interest cover may be
difficult and where the facilities include secured facilities on a
loan to value ratio, falling asset values may mean that you breach
(however inadvertently) financial covenants. In those circumstances
the lender is likely to look for additional “reward” to justify the
risk it perceives that it is taking. Re-pricing, additional fees
taken retrospectively, and even profit participation are not
uncommon. The key issues in dealing with the banks would be your
ability to demonstrate a stable business that is robust against
recession and does not therefore represent a substantial risk to the
lender. Take a look at
our feature on whether or not you are recession ready to see
whether you can answer some of the key indicators for a well managed
recession proof business.
For more information please contact
Andrew Livesey.
Copyright 2006 - 2010
Taylors Solicitors
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