Liquidity Could Be Your Best Asset During the COVID-19 Pandemic: Top Considerations for Your Management Teams and Boards

Last week, a Houlihan Lokey team helped a premier corporate client raise a significant amount of additional debt capital in order to be better prepared during the coming months. We suspect there will be many more such transactions during the course of this spring.

These are unprecedented times, and no one can accurately predict the full extent of the impact the COVID-19 crisis will ultimately have on the financial well-being of businesses. However, one thing is clear—the prognoses of companies can change incredibly quickly. Therefore, ensuring your organization has the liquidity it needs to weather these worst of storms is among the single most important actions company directors can take. Fortunately, management teams and the boards they report to can take several important steps today.

First, you need to quickly determine, as best you can, what the business needs really are and, more importantly, what they could become. A CFO or treasurer’s new “base case” for estimating future financial results has to reflect that (i) the economic impact of the measures required to slow or stop the virus could deal a severe blow to their revenues, and (ii) that this adverse impact could go on for several months.

This exercise will show what the company’s need for additional liquidity might be. Many businesses have the untapped credit lines needed to fill their potential liquidity need, but we are confident at least as many do not.

For those companies that do not have adequate excess liquidity to carry them through the crisis, management essentially has four key areas to look to for support:

1. The company’s existing lenders. They are already “long” the investments and may choose to support the firm, if for no reason other than to protect their existing exposure by enabling the company to make it to the other side.
2. If existing lenders are not able or willing to increase liquidity, the company can look to new lenders who can either refinance the existing lenders entirely (which is of course harder the more challenging the crisis becomes), or who can come into the structure on terms that work within the confines of the existing lenders’ contracts. This will be easier for larger companies which operate with credit agreements that usually allow for sizeable baskets, thereby allowing such an investment to be large and worthwhile enough for a new lender to allocate its resources. Assuming this checks out, there is a large stockpile of private debt that has been raised and is committed to being deployed in European direct lending. In engaging with these lenders, the key is to balance the security of the company with the cost of capital. Companies need reliable, dependable finance—it is all about certainty, not about every basis point in margin or fee.
3. It is imperative that companies seek to fully understand governmental programs designed to provide relief from the COVID-19 outbreak to the corporate sector. Much of such support will likely be provided via commercial banks. Although, as of the date of this post, the details are still murky and more clarity around how to access these support systems is needed. This unfortunately will be an evolving area and may or may not come soon enough for some companies.
4. Your existing equity shareholders. We suspect in many cases that this will prove a challenging path, given public markets are highly volatile, and private equity owners are themselves trying to figure out what all of this means for them. Plus, equity is relatively expensive. However, no option can or should be dismissed, and we do anticipate that the number of emergency rights issuances and private equity infusions will see a sharp uptick.

Securing additional liquidity has much more upside than downside. If it turns out a company doesn’t end up needing all the additional capital it raised, it should simply be seen as one of the best insurance policies ever taken out.