A Comprehensive Risk-Evaluated Checklist

As reported in 7/15 WSJ, the country’s ten largest banks reserved $28B in the second quarter for bad debt losses. Greater reserving is expected for this quarter. The stock market is also expecting losses: the SPDR S&P Bank Stock index is down 32% year-to-date.

The ugly reality for the companies that have been written off is that any recovery by the banks is pure income for them. Bank workout teams are highly motivated to get as much as they can as quickly as they can. To avoid workout or Chapter 11 negotiations, you should:

  1. Develop a presentation for how your company has been managing A/R and supply chain credit risks.
  2. Stress test your operating metrics and financial covenants using different scenarios such as 2nd or 3rd quarter results – and say, 10-25% additional downside – for the next 2-3 quarters.
  3. Review these scenarios on your permitted basket limits, especially those with % limits of B/S items, such as Total Assets or a cash flow metrics related to EBITDA. Covid-19 is shrinking many balance sheets and operating results. Be sure to include any tighter baskets outside your senior credit facility.
  4. Identify other credit weaknesses by having your SMEs document the company’s compliance with your major nonfinancial covenants in their areas of responsibility.
  5. Then consider how you can best address your lenders. Pro-active communication with the lenders about troublesome issues will have a huge impact on how they assess your company and their willingness to work with you.

Implementing an improved debt compliance process is a lot of work. DCS can help:

  • The DCS Debt Manager is a comprehensive, automated in the cloud debt compliance solution.
  • The DCS General Questionnaire allows companies to quickly — and cost-effectively — manage get a handle on their nonfinancial covenants.