How to respond to liquidity and debt challenges in the wake of COVID-19

March 18, 2020

 

With much uncertainty still ahead, many businesses are already struggling to find liquidity, manage debt and stay afloat in the wake of COVID-19. Preparing for the disruption of COVID-19 will be an on-going process, so too will modifying action plans that respond to the unique and evolving challenges this public health emergency presents. The time to start preparing and responding to the crisis is now.

Despite the unprecedented obstacles businesses face, there is optimism and recently announced government assistance comes as welcome news. On the one hand, the progress seen in China after the past two months reminds us that the drastic measures we are taking are worth the short-term pain. On the other, time is of the essence, especially for Canada’s SMEs. While the stimulus package announced by the government is promising, many organizations are already dealing with significant challenges that are quickly unravelling their safety nets.

“The news last week from the Canadian government will provide relief for many businesses,” says Clark Lonergan, Partner and Senior Vice President of BDO Canada’s Financial Recovery group. “However, the $82 billion in stimulus will take time to be channelled through to the businesses in need. Given the scale of the crisis, this financial aide might be too late.”

Indeed, businesses should not rely on these external packages to survive the financial threat of COVID-19. More proactive measures are required, even for companies that are not yet experiencing financial difficulty. As with any crisis, it’s a time to regroup, look inward and gain a better understanding of your company.

Assessing financial stability in the wake of COVID-19

Wherever your business is situated financially, COVID-19 will likely present unforeseen challenges. A business health check to identify vulnerabilities and financial stability is the first step in assessing your company’s preparedness.

Four key measures can help you understand what “being prepared” looks like for your organization.

  1. A business risk assessment can identify operational, financial and market risks; determine direct and indirect impacts, third-party vulnerabilities, and generate action and mitigation plans.
  2. Financial Stress Testing can assess the economic impact of macro and micro assumption changes to your company’s business plan and financial forecasts.
  3. Liquidity Management can quantify the liquidity impact of the various financial stress testing scenarios; determine short-term (weekly if required) liquidity challenges/opportunities, and examine possible capital stack realignment to mitigate liquidity constraints.
  4. Stakeholder Management can identify key stakeholders; provide guidance and pro-active management, and develop communication strategies.

Responding to liquidity and debt challenges

The battle against COVID-19 will require creative strategies to find liquidity and manage debt. A multifaceted approach that addresses your organization’s specific financial challenges, its market outlook and its chain of command will determine the best way of managing cash flows and ensuring resilience.

The decisions that business owners will have to make over the coming months will be about finding the right balance between being prepared and responding with the right force. Here are seven areas where we can help you respond to the crisis.

  1. An independent assessment of financial and operational performance can help prepare a business improvement plan and enable its delivery to key stakeholders, including c-suite, board of directors and major lenders.
  2. revision of your integrated financial model, forecasted under various scenarios, can clarify your needs and provide direction based on historical results, market conditions, customer base, supply chain, and asset base.
  3. A clearer understanding of the management tools available to you for establishing and tracking key performance indicators, including borrowings and liquidity (dashboards, weekly cash flow forecast, critical customer and supplier assessments).
  4. A closer look at your transaction level data can uncover large and easily attainable savings opportunities that will allow you to unlock cash.
  5. An evaluation of your current debt structure, financial forecasts and potential financing requirements can help you understand debt restructuring alternatives and also assist in lender due diligence and negotiations.
  6. In times of crisis, considering the restructuring or sale of the business, or parts of the business, through informal or formal processes, will increase liquidity and maneuverability while you weather the storm.
  7. Lastly, finding a trusted advisor can help you unlock all of these capabilities and convey your efforts with greater clarity to the c-suite and the board of directors. If you are too busy taking care of the immediate concerns that come with crisis management, an experienced professional can help guide your company’s stakeholders toward a single vision by developing communication protocols that proactively respond to concrete business challenges.

Business owners will need help navigating the diversity of challenges that will inevitably come their way. Despite the relative strength of the Canadian and American economies, the crisis does not come at a good time for Canadian businesses, who have witnessed an increase in corporate insolvencies for the first time in twenty years.

“COVID-19 has the potential of becoming the biggest financial threat of the 21st century, much more significant for the Canadian economy than the global financial crisis of 2008-09,” says Clark Lonergan. “Leading up to this crisis we were already seeing a rise in corporate insolvencies in Canada. With the added pressure of COVID-19, this will add more fuel to the fire. Companies must be proactive in the ways they prepare and respond to this crisis.”

How BDO can help

As the crisis evolves, it is inevitable that finding liquidity, renegotiating debt and restructuring will be necessary for many Canadian businesses. It’s a reality that you don’t need to face alone. Our experienced professionals know how to plan for the survival of your business. The sooner you engage with us, the more solutions will be available to you. For more information on how you can respond to these challenges, contact BDO’s restructuring group.

Hugo Daoust, Senior Manager, Financial Recovery Servicess

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