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Emerging stronger from the covid-19 pandemic

Managing debt and liquidity challenges


With vaccinations on the rise and COVID-19 case counts falling in most of the country, there are indications that we're beginning to emerge from the COVID-19 pandemic–and hopefully the worst is behind us. There's a lot to look forward to as restrictions ease and the economy opens back up, especially for businesses and business owners who have faced significant headwinds over the last year and a half.

If your business has survived thus far, you've likely navigated through the most challenging crises your company will face. But you're not out of the clear yet, and certainly, different companies and certain industries will recover at different rates.

As of now, the Canadian government continues to support businesses through various subsidies, funding operational costs such as, rent and wages. Meanwhile, lending rates remain low and banks have been patient due to the support they are receiving from government. But these subsidies will eventually come to an end, likely in the fall of 2021 and the banks passive risk attitude will return to more normal levels.

If you took advantage of loans from the government and/or your bank, you will likely emerge from this crisis with significantly more debt than you began with. Going forward, your business doesn't have to just go back to normal operations it has to accelerate operations to now pay for that additional debt.

Now is the time to assess your business with a post-COVID lens; you should be asking, how can I recover costs, find liquidity, and restructure debt to secure my future? A proactive approach is imperative, BDO experts can help you regroup, look inward, and modify action plans in order to emerge from this period stronger than before.

Assessing financial stability post COVID-19

Wherever your business is situated financially, a business health check to identify vulnerabilities and financial stability is the first step in assessing your company's ability to recover and emerge stronger from this crisis.

Here are four key steps for assessing your business post-COVID:

  1. A business risk assessment can identify operational, financial and market risks; determine direct and indirect impacts, third-party vulnerabilities, and generate action and mitigation plans.
  2. Financial stress testing can assess the economic impact of macro and micro assumption changes to your company's business plan and financial forecasts.
  3. Liquidity management can quantify the liquidity impact of the various financial stress testing scenarios; determine short-term (weekly if required) liquidity challenges/opportunities, and examine possible capital stack realignment to mitigate liquidity constraints.
  4. Stakeholder management can identify key stakeholders; provide guidance and pro-active management, and develop communication strategies.

Managing liquidity and debt challenges

Managing increasing debt and finding liquidity post-pandemic will require creative strategies. A multifaceted approach that addresses your organization's specific financial challenges, its market outlook and its chain of command will determine the best way of managing cash flows and ensuring resilience.

Here are seven areas where we can help guide you through this next phase in your ongoing crisis response.

  1. An independent assessment of financial and operational performance can help prepare a business improvement plan and enable its delivery to key stakeholders, including c-suite, board of directors and major lenders.
  2. A revision of your integrated financial model, forecasted under various scenarios, can clarify your needs and provide direction based on historical results, market conditions, customer base, supply chain, and asset base.
  3. A clearer understanding of the management tools available to you for establishing and tracking key performance indicators, including borrowings and liquidity (dashboards, weekly cash flow forecast, critical customer and supplier assessments).
  4. A closer look at your transaction level data can uncover large and easily attainable savings opportunities that will allow you to unlock cash.
  5. An evaluation of your current debt structure, financial forecasts and potential financing requirements can help you understand debt restructuring alternatives and also assist in lender due diligence and negotiations.
  6. In times of crisis, considering the restructuring or sale of the business, or parts of the business, through informal or formal processes, will increase liquidity and maneuverability while you weather the storm.
  7. Lastly, finding a trusted advisor can help you unlock all of these capabilities and convey your efforts with greater clarity to the c-suite and the board of directors. If you are too busy taking care of the immediate concerns that come with crisis management, an experienced professional can help guide your company's stakeholders toward a single vision by developing communication protocols that proactively respond to concrete business challenges.

Statistics Canada tracked the impact the pandemic has had on insolvency of corporations and found that Bankruptcy Insolvency Act (BIA) filings declined during the pandemic, while the larger more complex restructurings under the Companies' Creditors Arrangement Act (CCAA) filings increased.

They state, “This decline in insolvencies could be partially explained by the government programs... this could suggest that corporations are waiting to see if more government aid is coming, before filing for insolvency. Low borrowing cost for businesses could also partially explain this drop in insolvency filings.

Conversely, CCAA's insolvency filings doubled. These results also suggest that corporations that filed for bankruptcy in 2020 were already in a precarious financial situation before the COVID-19 crisis hit. Even with the help of government programs, these corporations decided to file for insolvency.

How BDO can help

As the economy re-opens and business operations begin to return to normal, it is inevitable that finding liquidity, renegotiating debt and restructuring will be necessary for many Canadian businesses. It's a reality that you don't need to face alone. Our experienced professionals know how to plan for the survival of your business. The sooner you engage with us, the more solutions will be available to you. For more information on how you can respond to these challenges, contact BDO's restructuring group.

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