Refinancing before you have to

The difference between a refinancing and a restructuring is very often just timing. The same balance sheet, the same lender and the same underlying problem produce entirely different outcomes depending on whether the conversation starts before or after a covenant is breached.

Before a breach you are a client with a proposal. After one you are a credit issue with a request. The facts have not changed. Everything else has.

What changes at the breach

A breach usually moves the file to a different team inside the bank, with a different mandate. The relationship manager who knows the business is no longer the decision-maker. The new team is measured on recovery and risk reduction, not on growing the relationship, and their instruments are repricing, tighter covenants, additional security, amortisation, restricted distributions and shorter tenor.

They may also be reasonable and commercially minded. But the framing has changed, waivers now have a price, and the sponsor has lost the ability to choose the timetable.

The window, and what closes it

The useful window opens when management can see the pressure coming and closes at the breach. Typically that is at least two, and ideally three or four, quarters of visibility — enough time to prepare a case, run a process and document an amendment without doing it under duress.

What closes the window early is almost always the same thing: waiting for the forecast to improve. Management sees a covenant tightening, believes the next quarter will recover it, and by the time it has not, there is no time left to run anything but an emergency conversation.

What a lender needs to see

• A rebuilt cash-flow case, not the original forecast with new dates. If the earlier plan was wrong, say so and explain what has been learned.
• A specific request. Which covenant, which periods, what relief, and what the borrower offers in return. Open-ended requests for flexibility invite the harshest reading.
• Evidence of self-help already underway. Cost action taken, non-core assets under sale, capex deferred, shareholder support committed. A lender asked to move first will move cautiously.
• A downside case showing the proposal still works if things get worse. The lender will build one anyway; better it is yours.
• A realistic exit — how and when the facility gets repaid or refinanced under the amended terms.

Refinancing for the right reason

Not every early conversation is defensive. A great deal of the debt we look at was raised for a previous phase of the business and no longer matches it — amortisation set against a cash conversion cycle that has since changed, tenor too short for the asset, working capital lines sized for a smaller operation, security granted more broadly than the current facility needs.

Approached from strength, with performance behind you, these are ordinary commercial negotiations. Approached at the point of stress, they are concessions.

Where we come in

We rebuild the case, prepare the standstill or amendment proposal and run the negotiation — with a clear view of how the request will read from the other chair, because we are engaged by capital partners as well. Where refinancing with a new counterparty is the better route, we run that process instead, and our network is wide enough that the incumbent refusing to move is rarely the end of it.

The one thing we cannot do is create time. That is the part the borrower controls, and it is worth considerably more than any negotiating skill applied later.