Long term creditors: the benefits of informal creditor arrangements

Welcome to the fifth piece in our 'Building a resilient balance sheet for 2021' series looking at solutions and opportunities for 2021 viewed through the balance sheet. Our last post looked at some of the possibilities to convert longer-term debt to equity. We now look at other options for managing longer-term debts and liabilities. 

These can include debts to an investor or funder, liabilities to a landlord under a long lease and potentially longer-term supply agreements. 

Why managing longer-term liabilities is critical

Notwithstanding creditors’ enforcement options remain subject to the temporary Covid restrictions (extended to 31 March 2021 in respect of winding-up petitions and landlord forfeiture), actively managing longer-term liabilities is critical.

When a business is feeling short-term pressure, longer-term creditors may be willing to negotiate a period of respite and breathing space to trade through a rocky period. Examples of this could be a formal standstill agreement, a covenant breach waiver, renegotiation of existing payment terms over the mid to longer period or a more informal short-term payment deferral. 

How to negotiate a period of relief space successfully 

Successfully negotiating a breathing space will inevitably depend on having (and maintaining) good relationships with your key creditors. A funder will be less likely to support a request for a waiver of breached covenants from a business that hasn’t fully engaged with them during the preceding period. 

Similarly, a landlord who has been restricted from obtaining possession will be less willing to negotiate with a tenant it perceives as taking advantage of the Covid enforcement restrictions by withholding rent unnecessarily. 

Early and proactive engagement can be crucial in establishing the goodwill and trust necessary to negotiate a period of relief. If a creditor feels they have been appreciated and, critically, treated as a key stakeholder in the success of a business, they are more likely to be amenable to provide a short (or longer) term respite. Particularly if they see a productive relationship in the longer term.

This post has emphasised the benefit of informal agreements.  In our next post, we look at the new restructuring regime that can force creditors to participate whilst leaving directors and shareholders in control of their business.