A decade of low interest rates has come to an end and companies are facing a much-altered lending landscape. David Martin offers his advice on negotiating with banks and alternative lenders in the current economy

The Irish economy has faced many headwinds over the past year, but three key developments have had the most impact, namely: rising interest rates; rising inflation; and fluctuating energy prices.

Together, these challenges have made life considerably harder for borrowers tasked with balancing existing debt and new debt requirements with banks and alternative lenders. 

Up until recently, the world since 2010 had seen very low interest rates. This allowed some companies to borrow money at very cheap rates and use debt as a mechanism to finance business growth.

While we are still seeing a healthy appetite from both domestic and international lenders for funding new debt requirements and refinancing, lenders now face tighter credit conditions, delayed decision-making, and a notable shift in sentiment. 

Borrowers are also facing difficult trading conditions, resulting in cases of:

• actual or potential breached covenants; 
• issues in meeting debt obligations and therefore potential default;
• funding deficits against their business plan; and 
• refinance risk.

Debt plan for discussions with lenders

For borrowers, there are several factors to consider when putting together a debt plan. Working with a professional adviser, companies should factor the following points into their plan.

Present data early

Presenting “self-help” data (evidence to prove that the organisation has considered all options) to the lender at an early stage is crucial for both traditional and real estate companies, regardless of whether they are looking for new debt, refinancing, or dealing with covenant breaches. By presenting a critically assessed recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants. This plan should be put together after you consider the following “self-help” measures:

• Enhancing revenue and portfolio optimisation: identify and remove loss-making products and services;
• Price: understand and demonstrate what costs can be passed on to the end user;
• Improving margins: demonstrate to the lender how  margins have been improved and mitigated against rising costs;
• Productivity and efficiency improvements: ensure costs are controlled;
• Labour cost management: deliver an employer value proposition to manage wages and retain talent;
• Policy optimisation: reduce cost base through regulatory and government supports.

By presenting a critically assessed recast set of numbers with robust assumptions, lenders are more likely to provide covenant waivers or recast covenants.

Be proactive with stakeholders

In addition to presenting early to lenders, commence discussions with Revenue and other creditors/stakeholders in a timely manner to set out appropriate plans. Engaging with customers is also essential to fully understanding the receivables timelines.

Forecasts, covenants and debt requirements

It is important to demonstrate the impact of any self-help measures the company has taken to bolster forecasts for the business and how they might impact financial covenants (for existing borrowers) or projected covenants (for a new borrower).

The self-help measures and the financial model outlining forecasts should result in a comprehensive understanding of the organisation’s funding requirement, which in turn helps to identify what the debt ask from the lender is.

Further, organisations should access their facility agreements to ensure full understanding of:

• terms and conditions of lending documents including all covenants; 
• what the covenant headroom is; and 
• all events of default that are in the lending documents.

Once funding requirements have been established, being able to demonstrate to a lender how they are getting repaid is a key part of the negotiation. 

While banks and most debt funds will usually expect repayment to come from the free cashflow of the business, some debt funds and special situation funds will look at repayment from other sources, including the sale of assets, partial disposals and other liquidity events.

Additional sources of capital 

Some companies carry a high net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA), high loan to value, and low interest coverage ratio. 

A review of the capital structure of the company and these key leverage ratios, as well as the ability to service principal and interest, will be a key determinant in understanding if other sources of capital might be needed to meet funding objectives in the short-, medium- and long-term. 

Consider too if there are other sources of capital from existing debt providers or other debt and equity providers.

Regular review 

Ensure that cashflow and revised strategy is kept under regular review and the requirement for additional sources of capital is reviewed on a continuous basis. It is key to stay up to date with government supports available for organisations. Examine your hedging policy against best practice and make sure to regularly review it.

Recovery 

Crucially, at the presentation with a lender, you must demonstrate—through restatement of cashflows and plans (where applicable) for additional sources of capital—that the organisation is on the path to recovery and the lender will get full repayment.

Debt solutions

When negotiating with your lenders, it is worth considering the range of options from overseas, which may be helpful. 

Despite the previously outlined headwinds, there are numerous international lenders that view Ireland as an attractive destination for debt transactions.  

Previously, many companies saw their debt solution as a ‘bank v alternative lender’ solution. 

However, there are several companies whose banks work alongside alternative lenders, working capital specialists, private placement and bond issuers, thereby demonstrating that different debt solutions can co-exist for companies. 

The growing pool of lenders results in a more competitive landscape and choice for the borrower, increasing their debt options. 

And while having a mix of lenders attracts different terms and conditions for different funding needs, it can result in the diversification of refinance risk—an important criterion in any debt negotiation.

Some of the types of debt companies should consider include:

• Growth finance, e.g. expansion;
• Acquisition finance, e.g. buying another business;
• Real estate specialist lenders, e.g. development and/or acquisition;
• Refinance, e.g. amending or extending existing debt;
• Recapitalisation, e.g. capital structure optimisation;
• Special situation, e.g. liquidity funding;
• Private placement, e.g. long-term debt.

The economic headwinds we are currently facing are likely to continue as the year progresses. Indeed, the lack of certainty with respect to inflation and ongoing geopolitical events has led commentators to predict further interest rate hikes in the Eurozone in 2023. 

Whether or not your business is over-leveraged, a well thought out debt plan could help you to access the numerous debt structures and lending options available to Irish companies in the market.