Managing Your Company’s Debt During the Current Downturn

Peers of the CEO|Circle and CFO|Circle convene on a discussion wit Ken Loveless, a Managing Partner here at Founders Circle Capital and veteran of SVB on “Managing Your Company’s Debt During the Current Downturn.”

Below are 6 key takeaways from our call with Ken:

#1 – Think of lenders like hospitals: they are facing an overwhelming surge and are triaging for the most critical patients. If you are not in covenant default or do not have maturing loans, you are unlikely to be seen. If you are in urgent need, think about how to get to the front of the line. However, do not be combative; if you are shown the door, nobody else is going to take you in.

#2 – There is tremendous demand for debt right now. The cost of debt has materially increased: junk bond spreads have widened to nearing 1100 bps (vs. 400 bps a month ago). Not every lender has money. Your priority as a financial manager is accessing the debt that you need right now, regardless of whether it’s exactly what you want. Almost all negotiating levers are on the table, with price being the least important.

#3 – The institutions that are most able to provide the capital you need are Banks with Big Balance Sheets (think 3 B’s). Seek high quality, well-capitalized lenders.

#4 – Approach your lender as a partner: with transparency and collegiality. Remember that it is in your lender’s best interest to do what it takes to maintain a performing asset, and they want your partnership. Present the lender with an honest assessment (management’s view and the board’s view, as well as your own candid, unfiltered view); be upfront about risks and unknowns. Present a plan (while acknowledging that much is unknown) and a proposed framework to make decisions (if revenue goes to level X, we do A; if Y, we do B; etc) to avoid being reactionary later on – this shows your lender you are actively helping them mitigate risk. Finally, seek their input. Your priority is to get the debt you need and the lender’s priority is to manage risk and keep a performing asset.

#5 – Get out ahead of intermediate-term issues. Even if your lender does not have the capacity to entertain non-urgent negotiations, begin the process now and give weekly updates. When it is your turn to be seen, you will be in a better position to move quickly. Also, consider paying for a covenant waiver now rather than facing an expensive repricing later.

#6 – Currently, the CARES Act will not be accessible to the majority of venture-backed companies as it is currently written. However, there is evolving dialogue with legislators on the issue, so continue checking with your lawyers for any changes. To date, SVB is the only lender independently leveraging its strong balance sheet to support venture-backed companies with its offer of a 6-month principal deferral on existing term loans of $10M or less.