Since the inception of the deadly Corona Virus (COVID-19) in late 2019, several lessons have been learnt globally. A lot of Fiscal and Monetary policy measures have been instituted with the aim of relieving the overall impact of the virus on the citizenry and the economy at large. In Ghana, some of the Monetary policy measures implemented by the Bank of Ghana (BOG) among many others include a cut in the monetary policy rate by 150 basis point to 14.5% and a further reduction in the primary reserve requirement from 10% to 8%. Again, capital conservation buffer has been reduced from 3% to 1.5% and importantly Capital Adequacy Requirements (CARs) for commercial banks reduced from 13% to 11.5%.
Later in May 2020, BOG announced an Asset Purchase Programme up to Ghs10bn where BOG purchased Ghs5.5bn of the Ghana COVID-19 relief bond with a 10-year tenor and two-year moratoriums on principal and interest priced at MPR. The reliefs to the Specialize Deposit Institutions (SDIs) cannot be overemphasized, thus liquidity support to Savings and Loans and a further reduction in their primary reserves from 8% to 6% for Savings & Loans and 10% to 8% to the Microfinance institutions. On the Fiscal side, the story is not different.
Despite all these interventions, a lot of corporate organizations have had to rethink of meeting and servicing their short, medium to long term debts (loans) on the back of facilities secured from commercial banks. The general slowdown in the economy and business momentum coupled with the lockdowns have impacted the cash flows of many firms. As the saying goes, in every adversity, there are opportunities in disguise. This COVID-19 period gives firms the opportunity and leeway to approach their lenders and restructure their existing facilities.
Why Restructure Corporate Debts
Corporate debt restructuring basically involves the reorganization of outstanding obligations to creditors by corporates to reduce borrowing cost or/and restore liquidity. If such measures are not taken, the result is Corporate debt defaults which is the inability of the borrowing company to meet debt obligations which involve servicing of interest and principal at the due date. In fact, any client who defaults could have serious consequences on the borrowing company and efforts should be made to avoid loans defaulting at all times. Some consequences of corporate debt default include reputational damage, a takeover of the company, insolvency, poor credit rating, borrower’s inability to borrow, high-interest rates and regulatory interventions.
In effect, the best option for companies struggling during this period with their debt obligations is loan restructuring. It`s important to highlight that, a company may need to restructure its debts- not just because it may default but rather to obtain better terms and conditions which includes lower interest rates, extended tenure of the loans and the ability to make a financial adjustment to Assets and Liabilities among others. Again, you may consider reprofiling your debts if:
- you aim to bring in new lenders and take additional facility,
- To remove any non-cooperating or insolvent lenders,
- To convert a secured loan to an unsecured loan or vice versa and
- if you wish to possibly address any regulatory challenges.
Methods of Debts Restructuring
There are several approaches a corporate can opt to restructure its debts. The first process to consider is through Novation. Novation is the process by which the original contract is extinguished and replaced with another, under which a third party takes up rights and obligations duplicating those of one of the parties to the original contract. This means that the original party transfers both the benefits and burdens under the contract. The benefits could be in the form of money or the benefit of a service, while burdens are what the party is obliged to do to receive the benefits, for example, payment for a service or goods, or the performance of a service. The other options are to renegotiate and amend the terms and conditions of existing financial documents or enter into a new financing agreement with existing and/or new lenders and use the process to repay existing loans. Subordination is also available for consideration. Subordinated debt (also known as a subordinated debenture), is an unsecured loan or bond that ranks below other more senior loans or securities with respect to claims on assets or earnings.
Why must banks accept restructured debts?
Though there are several reasons why commercial banks may be recording high Non-Performing Loans (NPLs), some banks refusing to accepts debts restructuring may possibly be the cause of some of the bad loans we see in the books today. Importantly, there are several benefits to banks. It enhances the quality of the bank loan portfolio. It also assists with the eliminating the making of a 100% provision for the loan. Banks must accept clients restructuring to prevent a default and the cost of enforcement.
Any potential benefits to Corporates?
The benefits of restructuring corporates loans cannot be overemphasized. It helps to consolidate all debts to a single lender. Although debt consolidation is not the only reason for restructure, it is one of the most common. Over time, small businesses tend to acquire a number of debts with different lenders, but often find that their cash flow is affected by the volume of separate repayments to be made. Consolidating all debts to a single lender helps with cash flow management as payments are due just once a month, rather than across multiple days. It also makes budgeting and payment processing much less time consuming.
Access equity or free up cash in business. Debt restructure can allow you the client to access equity which can then be used to grow the business, so long as the loan to value ratio stays within acceptable bank rates (this differs depending on the product and lender). Changing the loan product can help with cash flow and ensure you have access to cash to cover challenges in the business. For instance, I have seen numerous clients improve their cash flow by changing from a principal & interest business loan to a line of credit facility, which allows them to access cash only when it is needed.
Lower interest rates. It’s an unfortunate but well-known fact that banks do not reward customer loyalty. Although you may have been with the same bank since childhood, you will not be eligible for new customer specials or discounts on your loan rates. Debt restructure offers an opportunity to reduce your interest rate with a new lender and take advantage of special rates for new customers.
Restructure to a more suitable loan facility. As your business grows and changes, so too do your financial needs. Whilst a straight business loan may have been appropriate in the start-up phase of your business, there may now be a more suitable loan product on the market. For example, a line of credit allows access to capital only when it’s needed, and asset finance is a great way to take advantage of tax benefits on loans used to finance the purchase of income-producing assets.
The benefits can go on and on, the key point is that COVID 19 has thought us that there is opportunity in adversity. Where a company is facing financial and liquidity challenges, coupled with cash flow challenges amid uncertainty and global meltdown to service commercial bank loans, it important to reconsider restructuring to ease the pressure. In times like this, commercial banks should be receptive to clients, understand their pain points and offer innovative solutions to help them stay afloat.
Credit: https://lendfin.com.au/5-debt-restructure-benefits/ Alaina Opuni-Frimpong,
Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works.
About the Writer
The writer is Finance and Telecom enthusiast, managing Banks and Non-Bank Financial Institutions, Local and Global Custodians, Trustees, Pension and Asset Managers, Insurance and Fintech relationships with an international Bank in Ghana. Contact: [email protected], Cell: +233-200301110