In continuation of my
thoughts on ‘Corporate
Nursing : Health is Wealth’ and
‘Lender
of Last Resort for the Borrowers and Critical Financial Illness Cover’, I
would like to further present the concept of a Defence Debt / Defence WC Lines.
The Defence Debt is a
new concept which is not explored by the financial markets. As mentioned in my
above earlier notes, corporates need to devise emergency plans in their good
times since only a timely financial aid can help in controlling the damage.
When a corporate is performing
well and its financial position is good, the lenders are open to extend further
loans/working capital lines for supporting the business. However, when the
corporate faces financial difficulties due to turmoil in the economy/industry,
the new or existing lenders do not agree to sanction fresh loans or its takes a
great deal of efforts in getting sanctions, NoCs from existing lenders for
sharing the security, and the disbursement of fresh loans. The delay in infusion
of these fresh loans in the company may jeopardize the operations and
reputation of the corporate. Therefore, it is of utmost importance that fresh
funds/working capital lines are immediately available to control the damage to
the business/reputation/credit rating.
Since the fresh
loans/WC lines are not easy to get in difficult times, therefore it would be
prudent to keep ready back up arrangement for the same in the good times.
The concept of Defence
Debt envisages availability of a pre-approved long term debt or a working
capital line or both sanctioned to the corporate in its good times. Depending
on the levels of operations and working under the various sensitivity analysis,
corporates/banks can work out the worst case scenarios/peak requirement scenario
(for WC lines based on MPBF/Assessment Method), and arrive at the level of a
debt or working capital lines (fund based, non based based) which a corporate
borrower may require in its difficult time.
In case of WC, the
assessment by lead bank (in consortium arrangement or by corporate itself in
case of MBA) may envisage the fund based or non based lines requirement by
stretching the WC cycle under the sensitivity analysis. Lead Bank may approve a
normal MPBF which can be tied up from the consortium and a top up assessment
which can be also funded by the existing consortium/other lenders. The Top up
WC lines/WC Term Loan (all are the forms of Defence Debt) can be permitted to
be immediately rolled into the company in case of stretched cycle/liquidity
issues. The advantage here is that since it is pre-approved line, all the
lenders would have given NoCs and security would have been already created for
the top up supporting lender. The existing lenders would be open to approve an
top up debt/line even in case of marginally Fixed Asset Coverage Ratio (FACR)
considering the facts that it is a contingency debt (chances of which crystalizing
into an outstanding debt would be minimal). Further, since this will be an
assessed finance therefore there would not be any regulatory issues.
The important issue in
case of top up lines would be to ensure that the line is available from the
lender on a short notice. In case of a normal line, a lender will be averse to
increase its exposure to a company facing/going to face financial difficulties.
Hence, there need to be a great understanding between the top up lender and the
borrower that the top up line is an oxygen and delay in disbursement of
the same would defeat the whole purpose. The financial cost/fee (i.e. the processing
fee and the commitment fee) to be paid by the corporate to the top up lender
would essentially be the cost/premium of getting the line on time.
The business of Defence
Debt/Top Up lines also provides an avenue to the lenders for increasing their
fee based income on secured basis and a tool to penetrate for developing
relationships.
