In these trying times of stiff economic headwinds, posed by falling demand, paucity of credit, a lack of liquidity in the market, obstinately high fixed costs and so on, companies are faced with serious existential questions about finance and investment. There are many questions to be answered on this front, but some immediate ones being faced by UAE companies are:
- What is the lending scenario likely to be over the next few years, given the bank consolidation and the new
IFRS 9 regulations.
- How should I handle a liquidity crunch and how should I handle this viz-a-viz my banks. How can I inform them
of my situation and tell them that I will not be able to meet my commitments.
- What should I do if my balance sheet has a funding mismatch – between long and short-term funding of my
I would like to address the question regarding the handling of banks, since it is a burning issue faced by hundreds of companies in the UAE. Companies face liquidity issues for a number of reasons – carried forward losses sustained some time ago, delayed or bad debts, excessive debt, diversion of funds, unproductive fixed assets and so on. There are four very serious issues here – One, how do I reveal my problems to bankers – can I reveal the whole truth, however unpleasant? Two, when do I reveal the problem to them – before or after a default in repayment? Three, what process do I follow if I have multiple banks? Four, how might they react – each bank has a different policy.
Each company’s situation is different but here are some common threads. First, the extent of the problem needs to be assessed before deciding the strategy of revealing the problem. Bankers want to know the truth, but for a variety of reasons, may not be able to digest it, if suddenly thrown at them. Extreme caution is called for. If the problem is large enough to warrant a restructuring of your liabilities, then the time to approach banks is when the problem is still some time away but your company is already demonstrating stress – vide delayed payments. If you go to the bank with no delays or defaults whatsoever and tell them you will have a problem in the future, the unfortunate response will be panic and a scramble to get as much of their money back as possible in the shortest possible time.
The approach to banks has to be on a one on one basis with a careful selection of which bank you approach first – each has a different tolerance for this sort of situation and will react differently. The only common denominator is that banks, in general, have become more understanding and want to work with clients to avoid losing money. However, considerable skill and knowledge of the inner workings of a bank are still required to navigate this dangerous landscape.
Being an expert in securing bank finance may be one thing. But negotiating a restructuring is another kettle of fish altogether. You are best advised to seek professional advice if you find yourself in this situation.
(Vikram Venkataraman is Managing Director of Vianta Advisors DMCC)