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Recession Ready? - Dealing with the Bank

» Posted on: 4 December 2008
» Posted by: Andrew Livesey
» Service area: Business Deals / Deals

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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.

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