Goods which have the borrower’s name on them or packaging with the borrower’s name will be more difficult to return because the manufacturer probably will be unable to replace labels or packaging because it is not worth the cost or effort.
It is likely that credit markets will tighten for non-investment grade borrowers despite the federal government passing the CARES Act. Borrowers with lower credit ratings may find it more difficult to replace existing lenders - which are becoming increasingly risk-conscious and which already have excessive troubled loans in need of restructuring. Therefore, retaining one’s existing lender is of paramount importance.
In the event that the existing lender seeks to terminate its lending relationship, the borrower should have an analysis demonstrating that, with modest relief and an action plan based upon reasonable assumptions, the borrower can be restored to covenant compliance. This requires a detailed turnaround plan for the borrower.
The borrower should also analyze the likely recovery to the lender in the event that the lender exercises default or termination remedies. What would be the lender’s recovery in the event of bankruptcy or liquidation? Are personal guarantees sufficient to make up the shortfall? Will the lender have an ability to liquidate its collateral at fair values given current market conditions?
The CARES Act enables banks to carry loans that would otherwise be deemed troubled loan restructuring (TLRs) as if they were normal performing loans. However, ultimately, a loan that is not repaid eventually impacts the balance sheet and income statement of the bank. Consequently, even short-term relief favored by bank regulators should be premised upon a turnaround plan.
The key to survival in a recession is to anticipate a lender’s every move and every question. Be proactive in doing the things that the lender will want to see happen. You will accomplish those things faster if you understand the thinking and the limitations of your lender and of your vendors.
Ken Rosen is a partner at New York City-based Lowenstein Sandler and chairs the firm's bankruptcy, financial reorganization and creditors' rights practice.