A2E founder: "Lenders must be more lenient"
In the wake of the Covid-19 pandemic, we spoke to Amin Amiri, CEO and Founder of a2e Industries, regarding the financial situation for many businesses in the UK.
It is an inevitable fact that many companies will breach the loan covenants set out in their agreements as a result of considerably diminished trading performance during the lockdown period.
The situation is most pronounced for quarterly loan covenant tests relating to quarterly results ending between at the end of May, June, July or August, as the lockdown began around mid-March.
Many of these businesses will invariably be applying for CBILS to fund their operations. If the incumbent lenders are also providing CBILS, then there will be a natural waiving of the loan covenant breaches.
However, in recent years, an increasing number of larger SMEs have had to raise funds from the many loan funds or private individuals subscribing to loan notes to fund companies - these loan notes are typically "sponsored" by a broker.
These LFs are not as heavily regulated as the banks and typically have loan portfolios of £50 to £500 million. Furthermore, there many hundreds of other loan notes issued as well as asset-based lenders. Almost every larger SMEs capital or loan structure would typically have one or more of these types of organisations as lenders.
Obtaining CBILS or any other form of finance would require the consent and co-operation of all incumbent lenders. Large banks are overseen by keen regulators and are, in the current circumstances, expected to show “leniency” towards loan covenant breaches relating to their own loan book. Indeed, the majority of SMEs only approach their existing bankers, who then request “leniency” from other lenders, in order to accommodate CBILs.
However, in the vast majority of cases, loan covenant breaches allow even one lender a commanding position and gives them the ability to take advantage of the situation in an unreasonable way. Of course, these lenders have the best interest of their funds in mind, but in many cases, they are in a position to hold all other lenders, the company and the shareholders to ransom.
An intransigent attitude by one lender can derail the ability of a company to receive vital CBILS loans. In a recent case, a particular lender has asked for a share stake of 51 per cent in a company to agree to “relieve” the loan covenant breach and allow a CBILS loan to be obtained. This unfair and opportunistic approach, in a national emergency, is unbecoming conduct.
Of course, a similar phenomenon happens in recessionary environments too. And many “weaker” businesses do not survive, and “remedial” or ”tough” actions by lenders are understandable. However, the present circumstances are unprecedented and even well-managed and valuable businesses are likely to have technical breaches when it comes to loan covenants.
A breach of loan covenants (which in this case has been caused by the virus, and not poor judgement of management and/or shareholders) gives a lender enormous power including the ability to bankrupt the company, and as such the negotiations to raise the CBILSfunds are fraught. It is a requirement of CBILS, to seek as much security as possible from the recipient companies. And as such, a realignment of security positions between several lenders and a company are inevitable.
The government has “changed” insolvency laws to enable the directors to continue managing the businesses without the fear of “wrongful trading”. Furthermore, it has been implied that creditors are not currently able to petition for bankruptcy.
Similarly, guidance has been provided to landlords, compelling them to be lenient towards rent defaults until at least September 2020. These are all welcome.
I suggest that the government should compel all lenders to show leniency for breaches of loan covenants and consent to a reasonable realignment of security arrangements until March 2021 where viable businesses have clearly been affected by the virus.
Indeed, once a CBILS funding has been agreed with a bank (or other lender), this indicates that the business has been affected by the virus and it is a viable business. Therefore, all other lenders to the company should show leniency and consent to CBILS funding in all but completely exceptional circumstances.
Finally, it is relevant and important to the health of the economy as a whole that predatory and opportunistic practices by any lender at such a difficult time should be made illegal. Seeking share ownership by lenders should be limited to a maximum of 25 per cent and be subject to buyback clauses. The interference of a lender as a major shareholder is undesirable for SMEs.
As a pragmatic measure, cases of dispute could be referred to an expert firm for arbitration. There are thousands of such experts available within accountancy firms and 3R organisations at reasonable costs. This measure would therefore make lenders aware of their holistic responsibilities within the context of a national emergency.