BY EDWARD KAYE
By the time this article sees publication, it will have been more than 15 months since the pandemic hit our shores and brought our industry to a screeching halt. As a former lender to the transportation industry, I can attest to the havoc it also wreaked on banks and finance companies, particularly in the early stages.
Some lenders were quick to move into action and offer deferrals or interest-only monthly payments. Others were like deer caught in the headlights, frozen in their tracks and not sure what to do.
Yet almost all, after a short period of time, all transportation lenders offered some form of relief. Some were more generous than others, but universally (at least from my experience) they realized the impact of COVID on transportation companies, and unless they offered payment accommodations their only option was to engage in large scale repossessions with massive portfolio losses—something to be avoided at any cost.
Now that cities and events are starting to open, hospitality and leisure travel is improving, and Coronavirus Economic Relief for Transportation Services (CERTS) guidelines have been issued, there is light at the end of the tunnel. But how are your lenders treating you now? Let’s take a look at the quandary lenders are in, what type of relief is being offered, and how to reach a good result on your road to recovery.
The Problem:
The issue many transportation companies are facing is the debt currently on their books originated before the pandemic. Revenue in 2019 was far different than it is now, and for most small to midsize operators, 2021 cash flow does not support debt undertaken in 2019.
The lenders’ key consideration in granting any additional forbearance or accommodation given this backdrop is whether revenue will improve, the company’s likelihood of recovery, and to what extent the collateral is deteriorating.
The Options:
If you had pre-COVID issues with a lender and there is no recent verifiable improvement in your business, your options are limited. Most lenders want to see concrete details and data to support the decisions they make in either extending payment accommodations or restructuring your loans and leases.
Be ready to submit professionally prepared financial statements, forecasts, tax returns, and bank statements. If you do not have the ability to do this in house, hire outside accountants or consultants with expertise in the transportation industry to handle them for you. The days of using your cousin who is “good with numbers” is over!
“Lenders are interested in hearing your ‘story’ to support your forecast and financial data. Be honest, practical, and transparent. They want to hear your survival plans.”Lenders are interested in hearing your “story” to support your forecast and financial data. Be honest, practical, and transparent. They want to hear your survival plans. Submit a narrative along with your financial statements explaining what actions you have taken and how effective they have been. Detail discussions with key clients, highlight your cost and expense reductions, and state how much of your personal money you reinvested into the business (a key indicator for obvious reasons).
At least one lender I negotiated with on behalf of a client requested photos of the collateral to consider its value against the outstanding loan. Do not be afraid to give honest estimates of its market value. For the most part, lenders follow market values closely and understand when they are underwater in a fleet. If you were a good credit risk before the pandemic, it may be in the lender’s best interest to refinance your loan balance with more affordable repayment terms that will enable the company to survive and avoid a certain loss in the event of a bankruptcy filing or repossession.
I recently represented a 30+ year transportation company in negotiations with their primary lender, a midsize regional bank. Prior to the pandemic, the company was the bank’s best friend, a valued client, and a regular golf buddy. When the pandemic hit, and for the first time in its history the company could not make their scheduled payments, the bank accommodated deferrals for a year and then reminded the company’s principals that they personally guaranteed the loans.
After a series of negotiations communicating a realistic plan of repayment, the bank agreed to reduce the interest rate on the existing debt, extend the repayment term, and waive any prepayment penalty as vehicles are sold. However, they did force the borrower to cover the bank’s legal fees for documenting the settlement.
The message here is that a transparent process of full disclosure was developed when the bank decided they could no longer extend payment deferrals beyond a year. They understood the sharp revenue impact the pandemic took on the company, but they also understood the company’s story and likelihood of survival. I’m sure they also calculated the impact of the company filing for bankruptcy protection if a settlement could not be reached.
Practical decisions were made between reasonable people, and I believe all concerned parties avoided a protracted and expensive litigation.
Regrettably, not all lenders follow this approach. In another negotiation with a different transportation company and different lender—after weeks and months of financial disclosure, clear and honest communication, and numerous workout proposals—we are no closer to a settlement today than when we started.
The lender has not received any payment from the company in 15 months and now has taken the position that a rising tide lifts all boats, and they are demanding the borrower resume its scheduled monthly payments. Unfortunately, the tide has not yet risen high enough or fast enough for the borrower’s current and projected revenue. The speed and scope of any economic recovery is uncertain at best and the borrower conservatively estimates that they will not be able to resume full payments for another year. The likelihood of a satisfactory and amicable out-of-court settlement is questionable.
If you need continued forbearance, deferrals, or restructuring, and you have a business assessment with realistic verifiable plans to recover, now is the time to be proactive and communicate with your lenders—you may be surprised at the result. However, if your plan is to wait for the tide to rise high enough to lift you out of the water, it may be too late to negotiate any meaningful resolution and the treatment you receive from your lenders may not be what you are looking for. [CD0621]
Edward Kaye is a partner in the law firm, Schickler Kaye. He can be reached at ekaye@skfinancelaw.com.