In conversation with your creditors

Amidst a landscape of falling oil prices, investor uncertainty driven by geopolitical tensions and a challenging real estate sector, the global pandemic truly pierced the safety net of the tourism, retail and hospitality sectors that had become the backbone of the UAE economy. 

In response, the UAE Central Bank has introduced a number of measures to help provide a lifeline including the Targeted Economic Support Scheme (“TESS”) in March 2020. The stimulus package has two parts - the first being a AED 50bn package which allows all UAE licensed banks to obtain collateralised loans from the Central Bank at zero cost with the intention of easing liquidity in the market. Banks were strongly encouraged to pass on the relief measures by way of provision of up to six month deferrals on debt repayments for customers who met certain criteria including proving their performance and cash flows were negatively affected by COVID-19. The second arm comprises a Capital Buffer Relief where certain capital requirements for UAE licensed banks are temporarily relaxed in order to help absorb some of the exogenous shocks caused by the effects of COVID-19.

According to the UAECB press release in November 2020¹ in excess of 300,000 retail customers, 10,000 SMEs and 1500 private sector companies have benefited from the scheme. Within the first quarter of its introduction, 26 banks had already drawn down from the facility which has indeed provided a short term solution and bought valuable time for a multitude of companies that have deferred their repayments. However it is imperative that companies #ActNowToRecover and devise a sustainable solution with a holistic plan in order to take to their creditors in the event that challenges remain with meeting newly agreed debt service obligations. While lenders have been supportive in the immediate term, the appetite for subsequent or repeated deferrals will be incrementally more challenging. Accordingly, companies that have required the “breathing space” afforded by TESS must ensure they have a convincing and bankable plan of action for dealing with their debt obligations. With the recent announcement of the extension of the TESS scheme until June 2021, companies have a short window of time which could determine a longer term fate.

Question 1: Do I have enough cash to survive for the foreseeable future, see the business through negotiations and implement my plan?

As a Company in a distressed situation it is imperative that you have clear, real-time visibility over your cashflow and an understanding of the timing constraints you are working with to construct and implement a plan. There is a strong correlation between the amount of time you have to work with and the breadth of options that could be viable. Identifying liquidity crunches, funding gaps and the availability and utilisation of any funding lines is crucial. There should be absolute confidence in your current cash balance, a clear view on the quantum, ageing and collectability of receivables as well as clear visibility on payables.

Question 3: Is my plan realistic, holistic and able to pass through a credit committee?

You should critically review your projections and assess whether they are feasible, how they compare to historic actuals and whether any changes to market fundamentals have been suitably factored in. Once there is comfort about plausibility, what are the implications for the ability to service debt? Is interest being serviced? Is a proposed restructuring going to survive the next three years? Why should a credit committee agree to this deal and will there be implications on the bank’s provisions?

Question 5: What is my plan for engaging and communicating with creditors and other stakeholders?

In a restructuring scenario – no news is not good news. Stakeholders need to be kept informed and trust needs to be rebuilt for a process to succeed. Understanding the mix and objectives of different creditors is essential to successful negotiations. This transparency is key.

These five questions should be at the center of any meaningful and constructive conversation with your creditors. Debt restructuring negotiations are not a “business as usual” activity and often require dedicated resource and specialist expertise in order to navigate delicate and often pivotal circumstances involving multiple stakeholders. The support of an interim Chief Restructuring Officer or specialist restructuring advisers can often aid this process and allow existing executive management to continue to focus on the underlying business and operations.

Conducting a rigorous and honest assessment of your working capital, building a robust and realistic action plan and ensuring trust and transparency in your communications are essential steps in acting now to recover, and taking back control of your destiny, particularly as the end of the TESS scheme draws ever closer.

^{1. Bank CEOs welcome TESS extension by CBUAE}