With some New Zealand corporates coming under balance sheet/earning pressure arising from high inflation, high interest, contracted demand and a gloomy outlook in some areas, borrowers should be turning their minds to the next phase of managing their funding arrangements.
Read on for practical considerations for borrowers who are thinking ‘where to next’ with their debt.
Refinancing and new borrowing
We are aware that some borrowers may be looking to refinance or restructure their existing facilities or to seek further funding for new opportunities.
Matters for consideration include:
- Whether a lender is likely to want more security or greater oversight over your business, for example:
- If you have borrowed against cashflow from your business, good debtor management and collection will be important. Lenders will expect their borrowers to be monitoring recoveries closely and are likely to want tighter controls around defaults.
- If you have borrowed against some (but not all) business assets, lenders may be looking to take further security.
- For closely held companies, some lenders may look to directors and shareholders to support lending with personal guarantees and/or a further equity injection.
- Lenders will be keen to understand what measures and initiatives some of their borrowers have taken, or will take, to minimise the negative impact of the current market environment. This could include cost-cutting steps to assist with maximising cash inflows.
- We expect that lenders will approach highly leveraged funding with caution and may require additional measures to be taken. For example, the sale of non-performing assets to bring the current debt level down.
- For property investors and developers, the availability of loan facilities will be tied to the value of the underlying secured property, under a maximum loan-to-value ratio (LVR). Borrowers should consider whether updated valuations could negatively impact LVR in light of changing market conditions.
- Funding which depends on achieving minimum qualifying pre-sale level will also likely be impacted from the flow-on effects on the New Zealand economy and on buyers’ confidence.
Financial covenants and financial information
Likewise, borrowers should be considering how business is tracking against projections, and whether they need to approach their lenders to provide them with an updated snapshot of the business.
Many facilities will require borrowers to report to lenders on material departures from previously approved budgets and forecasts.
Director’s duties
If you are a director of a company that is operating a financially distressed business, it is important to get professional advice as soon as possible. This could help you avoid potential liability for breach of the statutory duties engaged on a company’s insolvency, primarily sections 135 and 136 of the Companies Act 1993.
Section 135 imposes a duty to avoid “reckless trading”. It provides that directors must not agree to, cause or allow the business of a company being carried on in a manner likely to create a substantial risk of serious loss to creditors.
Section 136 imposes a duty in relation to obligations. It requires that directors not agree to the company incurring obligations to creditors unless at the time they believe on reasonable grounds that the company would be able to perform those obligations when required to do so.
A recent Supreme Court decision highlighted the importance for directors in insolvency trading cases, where the court held the directors liable for insolvent trading and ordered the directors to pay millions.
Be prepared with information
When approaching either an existing or prospective lender, you should be armed with well-presented financial information.
If you are seeking further funding, lenders will want to see evidence that the business will be able to repay the funds as and when required. Lenders will expect to see projections that are based on a sound set of assumptions around business performance, market conditions and serviceability of loans.
New Zealand banks are also increasingly integrating environmental, social, and governance criteria into credit policies and lending activities, with this becoming a common feature in a bank’s overall credit risk assessment. Borrowers should consider this as part of their approach to banks when considering refinancing and new lending.
We’re here to help
Our Banking & Finance team is here to assist with all funding-related matters and queries. This includes assessing and addressing issues arising out of existing facilities, guiding you through a refinancing or restructuring process, or obtaining new funding. Please contact one of our team for an obligation-free chat.
